Rumors of lifetime ISA reform won't solve the issue; Reeves needs to deal with the issue of property prices

The Autumn Budget included an exciting announcement about Lifetime ISA reform

However, Jessica Sheldon says it would be disappointing to introduce a new ISA product that doesn't address the frozen property price cap.

"I have ceased making contributions to my Lifetime ISA. A friend said, "I don't think it's worth it." As she described her predicament, the other members of the group, who were primarily renters in their early 30s, nodded in agreement. The property cap, which has been set at 450,000 since the Lifetime ISA was introduced in 2017, is becoming increasingly restrictive if you want to buy in London. If your dream home exceeds this threshold, there is a greater chance that you will have to pay an effective penalty of 6.25 percent on your hard-earned savings, which makes the account much less appealing. Putting money elsewhere gives you more options.

I remember discussing the Lifetime ISA (LISA) when it first launched, almost a decade ago, with a group of friends who were long term renters in the capital. The Help to Buy ISA was being replaced by the Lifetime ISA, which appeared to be a welcome upgrade.

You can save up to £4,000 in a Lifetime ISA each tax year and receive a 25% (up to £1,000) government boost. You can pay £200 per month and receive a 25% top-up with the Help to Buy ISA, which you are no longer able to open. The total maximum bonus is £3,000.

I calculated that if you could afford to maximize your Lifetime ISA for more than three tax years, you would receive a higher bonus. Additionally, you can take advantage of compound interest because the 25% boost is deposited into your account the following month rather than having to be claimed at the time of purchase (you can hold cash and/or stocks and shares in Lifetime ISA).

To get the Help to Buy ISA bonus, the purchase price of a property is capped at 250,000, or 450,000 in London. The Lifetime ISA is a 450,000 blanket.

According to HM Land Registry, the average UK house price was 220,094 when the Lifetime ISA was introduced in April 2017. The average in London was 482,779. However, as of November 2025, the average price of a house in the UK is 271,188, with the capital costing 553,258.

The Lifetime ISA cap has not kept up with the increase in housing prices. According to AJ Bell's calculations in February 2025, the limit would have increased to 575,550 if it had been raised. This limits potential purchasers who have fewer reasonably priced options that fit within the parameters of the Lifetime ISA.

Strangely, the 450,000 cap also conflicts with the stamp duty land tax (SDLT) relief for first-time buyers, which is applicable to properties up to £500,000. For the first 300,000, there is no SDLT, and for the remaining 300,001 to 500,000, there is a 5% SDLT. The Lifetime ISA property value cap should be raised to at least reflect this relief.

The process of withdrawals from a lifetime ISA.

Lifetime ISA withdrawal rules are stringent. You can access the cash penalty-free if youre buying an "authorised" property (youre buying a property costing 450,000 or less, with a mortgage, using a conveyancer or solicitor and you first paid into the Lifetime ISA at least one year ago) or if youre 60 or older. If not, you will be assessed a 25% withdrawal fee unless you are terminally ill and have less than a year to live.

Let's say you have contributed 16,000 over the years. If there is no growth, you would have 20,000 with the 4,000 bonus. Then you want to take out the whole pot in order to purchase a property for £500,000. You would pay a 25% withdrawal fee of £5,000 because this is slightly over the Lifetime ISA cap, leaving you with just £15,000. Your savings will be penalized by an effective 6.25 percent.

Given that the 25% top-up is applied during the tax year, a withdrawal fee makes sense. However, reducing it to 20% would allow HMRC to recover the bonus if it is not used to purchase a first home. Since the rate was lowered to 20% during the coronavirus pandemic, we don't need a completely new ISA product.

The rumoured Lifetime ISA replacement.

Chancellor Rachel Reeves declared in the 2025 Autumn Budget that the government would release a consultation on the "implementation of a new, simpler ISA product to support first time buyers to buy a home" in early 2026.

It will replace the Lifetime ISA. Lifetime ISA reform is long overdue, which is encouraging news. But HMRC this week suggested the consultation will focus on launching a new product which removes the retirement saving aspect of Lifetime ISAs and the withdrawal charge.

It appears that the new product, which is supposedly scheduled to launch in April 2028, will revert to the Help to Buy ISA model, in which the bonus is applied at the time the property is purchased. According to Rachel Vahey, head of public policy at AJ Bell, although this should "be cheaper" for the government, prospective homeowners would miss out on the "investment growth earned on the bonus during the years they save for their first house."

Whether the property value threshold will be altered is unknown at this time. I really hope it is. If it remains frozen, the government would be ignoring the main problem with the Lifetime ISA and missing a huge opportunity to genuinely help first-time buyers get on the property ladder amid rising house prices.

I believe the Lifetime ISA is a great product for prospective homeowners, but its failing because the property cap hasnt kept up with house price growth. As real estate prices rise, first-time buyers have fewer options, and the frozen threshold is eroding consumer confidence in the product. If you were going to lose a significant portion of the money you invested to purchase your first home, why would you commit to locking up your savings for a deposit in a Lifetime ISA?

The government has a great chance to gain the support of Generation Z and millennials by correcting this defect by raising the limit. It would be a complete waste of time and taxpayer funds to introduce a new product that doesn't address the frozen threshold.