Would you abandon the Lifetime ISA in favor of the new First-Time Buyer ISA?

Plans for the government's new Lifetime ISA-style product, which is only intended for first-time purchasers, have been made public

The Treasury has unveiled plans for a redesigned Lifetime ISA (LISA) product that will eliminate the retirement savings component along with the upper age limit and withdrawal fees.

The government would hold a consultation on a "new, simpler ISA product to support first-time buyers to buy a home" in "early" 2026, according to Chancellor Rachel Reeves' 2025 Autumn Budget.

According to a Treasury consultation published this week, there is proof that the current product is "not working well for many."

The LISA was introduced in 2017 with first-time purchasers and pension savers in mind.

Watch the entire video here: According to current regulations, you can contribute up to £4,000 annually to a Lifetime ISA, and the government will add 25% of that amount, up to a maximum of £1,000 annually. The total 20,000 annual ISA allowance includes this allowance.

The funds can be saved and taken out at no cost when you turn 60, or they can be used to make a deposit on a property up to 450,000.

The Lifetime ISA is criticized for its price cap, age restrictions, and 25% withdrawal fee for "unauthorized" withdrawals.

This is acknowledged in the Treasury consultation, which also notes that the percentage of unauthorized withdrawal charges is rising annually, reaching 8% of all accounts opened in 2024-2025.

The LISA "may be diverting people from saving into pension products that may be a more appropriate for them," the document cautions.

"The government is committed to making home ownership a reality for as many households as possible," the Treasury stated. Nonetheless, we acknowledge that not everyone finds success with the LISA and that people ought to be able to modify their financial situation as their circumstances change.

"We recognize that the LISA may not be as accessible as it could be because of its complexity, which may have discouraged many providers from offering it and savers from using it. To assist first-time buyers, we are offering advice on the introduction of a new, more straightforward ISA product."

The First Time Buyer ISA (FTB ISA) is a replacement product that the government is currently requesting feedback on.

What would the First Time Buyer ISA entail?

The new First Time Buyer ISA (FTB ISA) will only be used for first-time home purchases.

In order to save for retirement, self-employed people who are unable to access auto-enrollment would have to stick with a LISA or concentrate on a private pension or self-invested personal pension.

Cash, stocks, and share options would be available, just like with the LISA. Money saved in the account would go toward your annual ISA allowance, and there would be a government bonus, though the amount hasn't been disclosed.

There is no upper age limit; accounts can only be opened starting at age 18.

The Treasury stated that in order to take into consideration market conditions and the broader public finance context, subscription limits, property price caps, and the amount of the government bonus will be announced at a future fiscal event.

"Increases to any of these parameters alone would come with a cost," the document continued. A higher government bonus might be possible with a lower subscription cap and/or property price cap, which would also shift the benefits to savers with lower incomes outside of London and the South East."

The Treasury stated that it would like the product to be available "as soon as practically possible," but no launch date has been set yet.

What distinguishes the Lifetime ISA from the First Time Buyer ISA?

The FTB ISA is different from the LISA in a few ways, such as being limited to first-time purchasers.

There won't be an upper age limit, in contrast to the LISA, which must be opened by the age of 40 and the bonus can only be earned until the age of 50.

When a person withdraws money to buy their first home, the government bonus will be paid as a percentage of subscriptions rather than the account value.

This means that the bonus is determined by the amount that a person has contributed to the account, less any withdrawals, rather than by any subsequent growth in investments or savings interest.

In the current system, if a contribution was made the month before, providers pay the government bonus in a LISA each month. For instance, a 25 percent bonus (250) would be added the following month if you deposited £1,000 in one month.

However, the new FTB ISA bonus will be given when a person withdraws money to buy their first house.

According to the Treasury, this eliminates the need for a withdrawal fee and allows savers to take money out without incurring penalties if their situation changes.

"Thousands of savers have been charged for accessing their LISA for an unauthorized withdrawal, frequently because their financial circumstances changed unexpectedly and they needed to dip into their savings," stated Rachael Griffin, a tax and financial planning expert at Quilter. It would be far better to let people access their money when they need it while still encouraging them to put money aside for a down payment on their first house.

"The choice to eliminate the upper age limit is equally significant. Although the average age of first-time buyers has been steadily rising, those who did not climb the property ladder before turning forty were essentially shut out by the Lifetime ISA. An age-neutral reformed product would represent a more contemporary housing market."

Moving away from an upfront bonus should simplify the system, according to Rachel Vahey, head of public policy at AJ Bell, but she has cautioned that savers will miss out on the investment growth they could have received on the bonus while increasing their deposit.

She pointed out that, assuming 4 percent growth net of fees, a person who invested £4,000 annually for five years in a Lifetime ISA with an annual bonus would have accumulated £28,165. The ISA holder would only have accumulated 27,532 under the FTB ISA, assuming the same terms, including payments, and the addition of a 25 percent government bonus when purchasing the home.

"For some first-time buyers, that could mean having less money available when they come to buy a home," Vahey continued."

Who has access to the FTB ISA?

Residents of the UK who are over 18 and want to buy their first house can apply for the FTB ISA.

The bonus is only available with a mortgage; cash buyers are not eligible, and the account must be open for a minimum of 12 months in order to qualify.

How is the Lifetime ISA going to fare?

As of right now, there is no indication that the LISA will be phased out, allowing accounts to be created and utilized.

Since they will have already received the government bonus, people who have money in a LISA will not be able to transfer it to the new FTB product.

However, you can make the same purchase with any money from both your new FTB ISA and your current LISA.

Both the new FTB ISA and an existing LISA will be available to individuals, but they will only be able to save into one during the same tax year.

The Treasury stated that the FTB ISA, LISA, and Help to Buy ISA caps will be aligned regardless of where the property price cap is set, ensuring that no account holders will lose out.

The Treasury is also suggesting that holders of the Help to Buy ISA be able to move their holdings into the new FTB product up to the subscription limits in order to protect them from losing out.

Furthermore, transfers from a stocks and shares ISA to the new cash FTB ISA will be prohibited as part of broader ISA reforms.

This is "well-intentioned reform," according to HomeOwners Alliance CEO Paula Higgins, but she cautioned that if the property price cap isn't reviewed, it runs the risk of correcting one injustice while leaving another firmly in place.

"The Treasury should update the cap now and future-proof the scheme by making sure it rises in line with house prices, instead of allowing it to become outdated again," she stated.

"First-time purchasers require a product that is built for the future housing market rather than one that is based on costs from almost ten years ago."