Retirement option to be scrapped in overhaul of Lifetime ISA
The government is set to scrap the option to save for retirement in its replacement for the Lifetime ISA.
The new savings product will only be available for first time buyers and will no longer pay the government’s 25 per cent bonus on a monthly basis, as part of the Treasury’s bid to simplify the ISA system for consumers.
The bonus will instead be paid as a lump sum at the point of purchase of a first home, meaning savers will no longer be able to benefit from interest payments and investment returns which are accumulated over the duration an ISA is held.
A Treasury spokesman told The Telegraph that it was “consulting on a new and improved product, specifically designed to support first-time buyers and without penalty for withdrawals”.
The new product will not carry a withdrawal penalty but it is unknown if the property value threshold will be changed.
The new product is set to launch in April 2028, with the existing LISA model available for use until then.
Current LISA rules
The current product, which was launched in April 2017, allows individuals aged 18 to 40 to contribute £4,000 tax free each year, until they hit the £20,000 ceiling, to either put towards the purchase of a first home or use for retirement, and grants a 25 per cent tax free bonus.
Under the current rules, withdrawals are enabled for properties valued under £450,000 or for retirement upon the saver reaching 60.
If funds are removed for an unauthorised purchase or for properties over the cap a holder is subjected to a 25 per cent penalty on the total amount withdrawn, effectively causing them to lose 6.25 per cent of their own savings.
Pricing woes and London’s battle
Last year the Treasury committee released a long awaited report on the LISA outlining issues with the product, such as the 25 per cent penalty on unauthorised withdrawals.
This led the government to acknowledge the account’s importance and in the Autumn Budget Reeves confirmed the government would launch a consultation on the product in 2026.
While the existing product benefits home owners across the country, due to the average property price being below the cap, Londoners have run into problems since the its introduction due to the average price breaking the schemes’ ceiling.
Since then, prices in the capital have continued to soar, with the average property hitting £661,000 in December according to data from Rightmove.
The cap has caused controversy in London, placing those who opt to use the LISA for more expensive properties, in increasingly strained financial conditions upon being penalised.
Others have since stopped paying into their account after realising it was not beneficial in the London market.
This has led many financial advisers and estate agents to call for a separate LISA, tailored specifically for London prices, in order for investors to use their savings without fears of ultimately losing capital.