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Will the Lifetime Isa be reformed in the Autumn Budget?
129,000 Lisa savers were hit with a penalty charge in 2024-25
The lifetime Isa (Lisa) hasn't changed much since it was introduced in 2017. After repeated calls for reform, and fresh figures showing more savers are being hit with a penalty, could something give in 2025's Autumn Budget?
You can open a Lisa if you're aged between 18 and 39 and are saving for a first home or retirement. Savers can put in up to £4,000 each year until they turn 50, with the government adding a 25% bonus of up to £1,000 a year.
Here Which? takes a look at the main concerns around these unique products and the most recent reform ideas, plus shares four things to think about before opening a Lisa.
The main Lisa concerns
If you withdraw the money for any reason other than buying your first home or for your retirement, or because you're terminally ill, you will be hit with a 25% penalty. You also can't use the money in a Lisa to buy a home valued above £450,000.
HMRC data revealed that withdrawal penalties for those pulling money out of their Lisa surged to an estimated £102m across the 2024-25 tax year - an increase from £75.3m the previous year.
According to the figures, 129,000 people were hit with a penalty charge after making an unauthorised withdrawal last year - an increase from 99,700.
Overall, an unauthorised £408m was taken out of Lisas , with the average withdrawal standing at £3,100.
During the same period, 87,250 people withdrew money for the purchase of their first home - an increase of roughly 30,500.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said Lisas played an 'enormously important role in helping people to save for their first home or retirement', but the latest data on withdrawal charges shows the product is 'ripe for reform'.
- Find out more: best lifetime Isas 2025
How could Lisas change?
In June, the Treasury Committee published a report stating that Lisas needed to be reviewed to ensure the most efficient use of taxpayers’ money.
While the report stated that reforms to the early withdrawal charge and maximum property were both 'areas of focus' for the government to review, it didn't recommend any changes to these two issues. It noted that the withdrawal charge 'ensures that the Lisa has been used for its intended purposes: homeownership for first-time buyers or later life savings', adding that the £450,000 property price cap 'supports most first-time buyers across the UK, including those households who may find it difficult to get onto the property ladder'.
The recommendations the Committee gave were:
- Include risk warnings for Universal Credit: The Committee called for the government to align Lisa savings with pension savings under the universal credit means test. Currently, any savings held in a Lisa can affect eligibility for universal credit, and this isn't the case for other pension schemes. The Committee said that if that was not changed, the Lisa should be ‘clearly labelled as an inferior product’, with clear warnings that they may disadvantage anyone who could one day claim universal credit.
- Re-evaluate its dual purpose: The Committee doubled-down on its concern that the Lisa’s dual role - supporting both first-time homebuyers and retirement savers - risks confusing consumers and diverting them from more appropriate products, warning that this could put part of people’s savings at risk.
- Assess who the product is for: The Committee said the Treasury should use income distribution impact assessments to see whether the Lisa effectively targets people who need financial support.
Find out more: Autumn Budget 2025: when is it and what will it contain?
What has the government said on Lisa reforms?
In response, the government confirmed that it 'keeps all aspects of the Lisa policy under review and carefully considers all representations received'. However, it resisted major reforms to the Lisa, arguing that it is a valuable savings tool for both homeownership and retirement.
The government said it was committed to working with the financial industry to improve communication, particularly by better explaining the benefits for retirement and to those who use it to buy a home.
However, it rebuffed calls to exclude Lisa savings from universal credit means-testing, asserting that the Lisa is a savings product for those with capital, unlike pensions.
The government did agree to explore adding risk warnings about universal credit to future Lisa policy documents and to work with other departments to clarify the implications of savings on benefits.
Commenting on this response, chair of the Treasury Select Committee, Dame Meg Hillier MP said: ‘The government has an opportunity at the Budget to think again on the Lisa for would-be first-time buyers and those saving for retirement alike.’
4 things to consider before opening a Lisa
A Lisa isn't a savings product for everyone and, before opening one, you should consider a few things:
Where you want to buy
As house prices have skyrocketed, the Lisa property price limit has remained the same, so you can’t use it to buy in certain areas.
According to data from HM Land Registry, there are more than 50 local authorities in England where the average house price exceeds the £450,000 Lisa threshold.
Separate analysis from investment platform AJ Bell suggests that first-time buyers could be priced out of using a Lisa in 62 UK regions by 2029, based on the cost of a typical terraced house. The cost of a flat could also exceed the threshold in 19 regions by the same date.
Areas affected include prime London spots such as Camden, Kensington and Chelsea, as well as places outside of the capital, including Windsor & Maidenhead and Buckinghamshire.
Before opening a Lisa, you may want to take note of the house prices in the areas you would like to buy in.
- Find out more: what's happening to house prices?
The risk of losing savings
While the product offers a generous 25% government bonus, the 25% penalty not only reclaims the bonus but also takes a portion of your own contributions.
For example, if you save £4,000 and receive a £1,000 bonus, you have £5,000 in your account. If you then need to withdraw all of it for a non-qualifying reason, a 25% penalty is applied to the full £5,000 withdrawal, which amounts to £1,250. This means you would only get £3,750 back - effectively losing £250 of your own money.
If there is a chance you may need to access the money for any other purpose, you may want to consider a separate emergency fund.
- Find out more: how much could you save by moving to a commuter town?
The one-year rule
To use your Lisa to buy a first home without incurring a penalty, your account must have been open for at least 12 months since your first payment.
If you need to access the money for a home purchase before this time, the 25% withdrawal penalty will apply.
So if you're looking to buy a home within the next year, you may want to consider another product, such as a cash Isa or a high-interest fixed savings account.
- Find out more: what's happening to the Renters' Rights Bill?
Contribution limits
Pensions have a much higher annual contribution limit than Lisas. The standard pension annual allowance is £60,000, including your contributions and those from your employer.
In contrast, Lisas have an annual contribution limit of £4,000, which also counts towards your overall £20,000 annual Isa allowance. If you're a high earner or simply want to save more than £4,000 for your retirement each year, a pension is a much more flexible option.
- Find out more: lifetime Isas vs pensions
