In the Autumn Budget yesterday, the Treasury said it would publish its consultation into LISA reform early next year, adding that it would look into the “implementation of a new, simpler ISA product to support first-time buyers to buy a home”.
Earlier this year, the Treasury Select Committee launched a probe into whether LISAs were fit for purpose, with the then Economic Secretary to the Treasury, Emma Reynolds, saying in a later response to the committee that the government was “committed to make ISAs, including LISAs, as simple and flexible as possible”.
The LISA, which was launched in 2017, is aimed at those saving to buy their first home or saving for later life.
The saver can put in up to £4,000 per year until they are 50 and the government will add a 25% bonus to the savings, up to a maximum of £1,000 per year.
The LISA has been criticised due to the hefty withdrawal penalty when withdrawing money early, or for a different reason, and the property threshold being unchanged from £450,000, despite house price growth.
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However, the scheme has helped a lot of first-time buyers, with Jen Lloyd, head of mortgage products and proposition at Skipton Building Society, saying that since its launch, it had helped over 314,000 first-time buyers, “proving its value in unlocking affordability”.
She noted that Skipton Building Society had over 160,000 LISA savers and was one of the largest providers of the product.
“We hope that the government’s consultation on a new ISA for first-time buyers builds on this success and works with providers to design a product that goes further, helping even more people take their first step onto the housing ladder. We look forward to sharing Skipton’s unique insights on how the LISA has been used and the successes it has delivered as we help shape its future replacement,” she added.
LISA replacement should have better house price thresholds and withdrawal penalty
Richard Dana, founder and CEO of Tembo, said the LISA was introduced with the “right intentions”, but the “design hasn’t kept pace with the realities of today’s market”.
“The biggest flaw is the £450,000 property price cap, which hasn’t changed since 2017. With the average first-time buyer home in London now approaching £500,000, many diligent savers find they can’t use their LISA for a perfectly normal-priced property without triggering a penalty.
“That penalty – a 25% charge applied if the funds are withdrawn for anything other than an eligible first-home purchase or retirement – doesn’t just claw back the government bonus, it takes a slice of the saver’s own money too, an effective 6.25% loss,” he noted.
Dana said that if a replacement is brought in, it must fix three core issues: a price cap that reflects regional realities, withdrawal rules that don’t punish savers in financial emergencies, and a simple, first-time-buyer-focused design.
“With the right reforms, a new scheme could genuinely help more young people build deposits and buy sooner, but only if it’s modernised rather than diluted,” he noted.
David Hollingworth, associate director for communications at L&C Mortgages, said the LISA should “continue in its current form as things stand, but [it] clearly looks like there’s a desire to give it an overhaul”.
“The big benefit is the government boost to savings that helps to give aspiring first-time buyers an incentive to keep on building their deposit without feeling as though they are constantly falling further behind as house prices rise.
“That bonus feels like the right approach to encourage those that may otherwise feel that homeownership would continue to be out of their reach. I also think the fact that the bonus is added immediately, rather than at the point of use, helps savers see their pot growing,” he said.
Hollingworth agreed that the withdrawal penalty “could put some savers off”, as rather than reclaiming the bonus, the penalty could see “savers receive less back”.
“No one would suggest that the bonus shouldn’t be reclaimed, but that could be an area of focus for a new product.
“The other key area that will no doubt see calls for review is the maximum purchase price of £450,000. With such a large amount of regional variation in prices and the lack of any review of the maximum limit, this is an area that looks ripe for a revamp,” he added.
Hollingworth said that while a consultation on a new product was a “chance to improve” the product, there is a “danger that existing savers will fret about whether they should continue to contribute into their LISA”.
“I therefore feel that the new product should carry the ability for LISA savers to transfer into the new structure if appropriate. A prolonged period of consultation would only potentially plant a seed of doubt in savers’ minds, even though everything suggests that the LISA will continue in the meantime.
“It would surely be an own goal for the Chancellor to prevent those savers already working hard to save for their first home to be worse off by not being able to take advantage of a new, improved product.
“Hopefully, the new product will keep the simplicity of savings being boosted by the 25% (or more!) without the ‘what ifs’ that the current approach raises,” he added.
Consultation should consider LISA’s retirement use by self-employed
Carol Knight, CEO of TISA, said this was a “moment for sensible reform of the LISA, not a rush to scrap it”.
“LISAs have helped a generation of first-time buyers save for a deposit and, crucially, given many – particularly the self-employed – a simple, engaging way to build retirement savings.
“As the government consults on a new ISA for homebuyers, it must protect the strengths of the LISA and give clarity and fair treatment to existing savers – not dismantle a product that is already delivering for those trying to save for both a first home and later life,” she added.
Sarah Coles, head of personal finance at Hargreaves Lansdown, agreed that the LISA had helped support “hard-pressed young buyers” and was a valuable way – especially for the self-employed, who “fall seriously short” on pension contributions – to save for retirement.
“The right consultation on its replacement is vital, and needs to ensure that dedicated savers and investors, who have been putting money away for their first property or for retirement aren’t disadvantaged by any change,” she noted.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said the announcement would be “worrying for those who rely on it for their retirement savings”.
“The LISA has the ability to have a huge impact on the retirement prospects for groups such as the self-employed. This is a group that is not included in auto-enrolment and so miss out on… employer contributions. They may also find pensions lack the flexibility that they need, given as money cannot be accessed until at least the age of 55.
“The bonus on the Lifetime ISA has the same effect as basic-rate tax relief on a pension and any income can be taken tax-free after the age 60. Added to this, money can be accessed early in case of emergency, albeit subject to an exit charge,” she explained.
She added that the product had the “potential [for] the long-term resilience of this group”.
“The consultation into a replacement must consider the needs of self-employed people saving for retirement. They are already under-saving, so it’s important not to put any more barriers in the way,” she added.
