On 23 June 2026, HM Treasury launched a formal consultation on a new First-Time Buyer ISA (FTB ISA), designed to replace the Lifetime ISA (LISA) from around April 2028. The move follows a 2025 Treasury Select Committee report that branded the Lifetime ISA's design "fundamentally flawed", plus fresh HMRC figures showing savers paid £102 million in withdrawal penalties during 2024/25 alone — a 35% jump on the previous year. In fact, more people were penalised for taking money out early (129,200) than actually used the account to buy a first home (87,250), even though first-time-buyer withdrawals themselves rose by 54% over the same period. Unauthorised withdrawal charges have now reached eight per cent of all Lifetime ISAs opened in 2024/25, according to HMRC's own figures — the statistic that appears to have tipped the argument in Whitehall. For anyone holding, or considering opening, a Lifetime ISA, this is a story worth understanding properly. Nothing changes today, and a decision made in the next few months could look very different once the new rules are finalised.
This article is educational and general in nature. It is not personalised financial or tax advice, and nothing here should be read as a recommendation to open, close or withdraw from any specific account. ISA and pension rules can change, tax treatment depends on individual circumstances, and the value of stocks and shares investments can fall as well as rise.
How the Lifetime ISA Still Works Today
Nothing about the current Lifetime ISA has changed — the reform is still at consultation stage. Existing rules remain in force exactly as they have since the product launched in April 2017.
Eligibility and contribution limits
- Only UK residents aged 18 to 39 can open a Lifetime ISA, and the first payment in must be made before the 40th birthday.
- The annual contribution limit is £4,000, which counts towards the overall £20,000 ISA allowance for the 2026/27 tax year.
- The government adds a 25% bonus on top of contributions, up to a maximum of £1,000 a year, paid within roughly six to eight weeks of each payment.
- Savers can keep contributing and earning the bonus up to age 50. After that, the account stays open and can still grow through interest or investment returns, but no further bonus is paid.
- A saver can hold more than one Lifetime ISA over their lifetime, but can only pay into one in any given tax year (transferring between providers doesn't break this rule).
What the money can actually be used for
- Buying a first home worth £450,000 or less, anywhere in the UK, provided the account has been open at least 12 months.
- Withdrawing penalty-free from age 60, for any purpose — effectively a retirement pot.
- A terminal illness diagnosis (life expectancy under 12 months) also allows penalty-free access at any age.
The 25% charge that catches people out
Withdraw for any other reason — redundancy, debt, a change of plans, an emergency — and a 25% charge applies to the whole withdrawal, not just the government's bonus. Because the bonus was added on top of the saver's own money, this charge effectively claws back 6.25% of the saver's original contribution as well. HMRC's most recent figures show quite how often this happens: 129,200 people made an unauthorised withdrawal in 2024/25, paying £102 million in charges between them, up from £75.3 million the year before. And some individual cases are startling — Freedom of Information data uncovered average penalties of £10,600 on withdrawals of around £42,300, with close to 1,000 savers charged exactly £1,000 in a single year. The average unauthorised withdrawal across the whole pool was around £3,159. Since the Lifetime ISA launched, cumulative penalty charges are estimated at around £315 million.
Why the Government Decided to Act
None of this happened overnight.
According to the Treasury Select Committee's 2025 report, the reasons for reform were blunt. MPs concluded that combining a first-home deposit and a retirement account in a single wrapper confuses savers about what the product is actually for, and that the same dual purpose makes it more likely people choose unsuitable investment strategies for money they might need at short notice. HMRC's own research found awareness of the withdrawal rules is low among account holders, and that those hit by unauthorised withdrawal charges frequently cited financial hardship — unemployment or a need to repay debt — as the reason, rather than a simple change of heart.
A property price cap frozen since 2017
The £450,000 property price cap has never been raised since launch, even though average UK house prices have risen by roughly 27.9% over the same period. Had the cap tracked house price inflation, it would sit closer to £575,550 today. Analysis by AJ Bell shows the practical effect: average terraced-house prices in Sutton and Newham already exceeded £450,000 in 2025, joined by Mole Valley in 2026. Brent, Barnet, Southwark and Ealing are ordinary London boroughs, not prime postcodes — yet average flat prices in all four are projected to cross the £450,000 line by 2027, locking out exactly the buyers the scheme was built for.
What the Proposed First-Time Buyer ISA Would Change
The consultation, which runs until mid-August 2026, sets out the broad shape of the replacement product without confirming every detail. Based on what has been published so far, the key differences from today's Lifetime ISA are:
- No upper age limit. The FTB ISA would be open to first-time buyers aged 18 and over, with no 39-or-under restriction on opening an account.
- Home purchase only. The retirement-savings function disappears entirely — this would be a house-deposit product, not a dual-purpose account.
- No 25% withdrawal penalty. Withdrawals would work like an ordinary Cash ISA, Stocks and Shares ISA or Innovative Finance ISA — no charge for taking money out for reasons other than a house purchase.
- Bonus paid at completion, not during saving. Rather than landing in the account soon after each contribution, the government bonus would accrue as an entitlement and be released when a qualifying property purchase actually completes — and only where a mortgage is involved.
- Cash and stocks and shares versions would both be offered, similar to the existing Lifetime ISA and other ISA types.
What hasn't been decided yet
Several important numbers remain deliberately open in the consultation: the size of the government bonus, the annual contribution limit, and — perhaps most significantly for the reasons above — the new property price cap. HM Treasury says it is weighing the trade-off between a higher bonus and a higher price cap, with a decision expected at a future fiscal event rather than in the consultation itself. Industry commentators have noted this leaves savers with only a partial picture for now: the general direction is clear, but the figures that will determine whether the new account is actually better value than the current Lifetime ISA are still unknown.
What This Means If You Already Hold a Lifetime ISA
Existing Lifetime ISAs are not being closed or converted. Current holders can keep contributing under today's rules indefinitely, and it remains possible to open a brand new Lifetime ISA at any point before the replacement product launches. One detail confirmed by HM Treasury: because Lifetime ISA holders will already have received a government bonus under the old rules, there won't be a mechanism to transfer a Lifetime ISA balance into the new First-Time Buyer ISA — the two products will simply run in parallel until the Lifetime ISA is eventually retired to new savers.
Points worth weighing up now
A few practical points are worth thinking through, rather than acting on immediately, among others specific to individual circumstances:
- Anyone using a Lifetime ISA mainly as a retirement top-up — self-employed savers without a workplace pension, for example — should note that the proposed replacement drops the retirement function altogether. Review whether a pension, such as a SIPP, fits that part of the savings goal better, independently of whatever eventually happens to the Lifetime ISA itself.
- If a target property is anywhere near the £450,000 cap, that limit hasn't moved and won't move before the consultation concludes — it is a live constraint today, not a future one.
- The 25% withdrawal charge still applies in full under current rules. Work out the real cost of an early, non-qualifying withdrawal before acting — losing the bonus plus 6.25% of the saver's own contributions, regardless of what any future product might eventually offer.
- None of the proposed changes are guaranteed in their current form until the consultation closes and the government responds; the bonus rate, contribution limit and price cap could all move before final rules are confirmed.
A Word on Risk
A stocks and shares Lifetime ISA (or, in time, a stocks and shares First-Time Buyer ISA) invests in the market, meaning the value of contributions can fall as well as rise, and there's no guarantee a saver will get back more than they put in. Tax rules, ISA allowances and government bonus schemes can all be changed by future governments, and past patterns — including the direction of any consultation — are not a guarantee of what will actually be legislated. Anyone weighing up a first-home deposit, a retirement account, or a decision to withdraw money early should consider their own full financial picture, and speak to an FCA-regulated financial adviser if they want advice tailored to their personal circumstances. This article summarises publicly available information as of July 2026 and does not replace that kind of professional guidance.