Lifetime Isa retirement plan could be dropped by government in favour of a new home-buying Isa

Younger savers who have utilised the Lifetime Isa in order to build an extra retirement pot for later life are set to bare the brunt of sweeping changes to the tax-free account. 

The Government is looking to scrap the option to save for retirement in the Lifetime Isa and replace it with an Isa that can only be used to buy a first home.

Currently, a Lifetime Isa can be used for building a house deposit – but also as a retirement fund that you can tap into at 60.  

From April 2028, the Government will introduce an overhauled Lifetime Isa focused solely on helping first-time buyers. 

Crucially, the new account will no longer pay the Government’s 25 per cent bonus on a monthly basis – a a major perk of the account.

The bonus will instead be paid as a lump sum at the point of purchase of a first home. 

The proposed changes mean savers who have used the Lifetime Isa to build their retirement savings instead of a deposit for a property risk being left in the lurch. 

> Should you open a Lifetime Isa to save for your first home?   

Maike Currie, of Pension Bee, says: ‘The Lisa has become an important retirement savings product for a growing cohort of savers.’

The decision to scrap the retirement saving function of the Lifetime Isa will also disproportionalty effect those who are self-employed. 

‘Many self-employed workers, who lack access to workplace pensions, have turned to Lifetime Isas to build long-term savings, making the most of the government bonus,’ Ms Currie explains. 

‘Removing the retirement element without providing a clear plan for those who have used the Lifetime Isa in this way, risks it becoming a ‘zombie product’ and leaving these savers out in the cold,’ she adds.

You can save up to £4,000 a year, which the Government tops up by 25 per cent so savers could bag a £1,000 bonus a year. It is available to open between the ages of 18 and 40. 

It means for those who have utilised the full limit since 2017 could have roughly £32,000 in the account, plus £8,000 worth of government bonuses, alongside any investment growth. 

You can opt to save in a cash Lifetime Isa or invest the £4,000 allowance in a stocks and shares Lifetime Isa.

Currently, money can be withdrawn penalty-free to buy a first home worth up to £450,000 or after age 60 for retirement, which will be in place until April 2028.

The Government announced in the Autumn Budget it wanted to launch a consultation on the Lifetime Isa.

The Chancellor also announced an overhaul to the Isa regime which saw the cash Isa allowance being cut to £12,000 a year for under 65s – from its current £20,000 limit – from April 2027. 

Savers will no longer be able to transfer money from a stocks and shares Isa to a cash Isa and will face a charge of up to 22 per cent on any interest earned on cash sitting in a stocks and shares Isa from April 2027.