The Lifetime Isa (Lisa) was introduced as part of a sweeping reform of the pensions and Isa landscape, offering tax-free savings for either a first home or retirement, with a government bonus added to contributions.
It’s been a hit with first-time buyers, but significant issues remain — chief among them, the 25% withdrawal charge applied when money is accessed before age 60 for any reason other than buying a first home or in the case of terminal illness or death.
While many assume the 25% simply reclaims the government bonus, the reality is more punitive. Once you factor in the bonus and subsequent charge, early withdrawals effectively incur a 6.25% penalty on the saver’s own money. Yet this nuance remains widely misunderstood — even among financially literate users, according to recent HMRC research. The study also found that the penalty was often triggered by unforeseen life events causing financial hardship.
While it offers more flexibility than the now-defunct Help to Buy Isa, the Lisa retains a £450,000 cap on eligible property purchases
In 2020, the government temporarily reduced the charge to 20% in response to Covid-related financial pressures, essentially removing the penalty. Now, the Treasury Committee is examining whether that cut should be made permanent.
It should. Scrapping the penalty would extend the Lisa’s appeal beyond first-time buyers and encourage long-term saving. In today’s economic climate, anything that boosts individual financial resilience should be encouraged.
Since launch, the Lisa has largely served one role: helping first-time buyers onto the property ladder. While it offers more flexibility than the now-defunct Help to Buy Isa, it retains a £450,000 cap on eligible property purchases — a limit that hasn’t changed since 2017.
That cap is also under review by the Treasury Committee, and with good reason. Since the Lisa’s debut, ONS data shows average property prices have risen more than 33%. In London, the average first-time buyer property now costs over £472,000, making the Lisa increasingly irrelevant in the very market it was meant to support.
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There’s a strong case for removing the cap entirely, especially as annual subscription limits already restrict the size of government bonuses. At the very least, the cap should increase automatically in line with house prices, giving savers more certainty. With average first-time buyer deposits now exceeding £68,000 and taking up to a decade to save, buyers shouldn’t risk losing access to their Lisa funds just because property prices outpaced the rules.
Using a Lisa for retirement planning is more complex. Comparing it to personal pensions isn’t straightforward — but for many, especially basic-rate taxpayers, it can make financial sense. The 25% government top-up mirrors the 20% tax relief on pension contributions, and Lisa withdrawals after age 60 are completely tax-free.
Pensions, of course, come with upfront tax relief — sometimes at higher rates — but only 25% of the pot can be withdrawn tax-free. The remainder is taxed as income. For higher earners who expect to retire in a lower tax bracket, pensions may still have the edge. But for others, the Lisa deserves more recognition than it typically gets.
That said, personal circumstances always dictate what’s most suitable. Those eligible for employer contributions should prioritise workplace pensions. In these cases, the Lisa becomes a helpful supplement, not a substitute. And for higher earners, pensions still offer greater flexibility and scope.
One often overlooked flaw in the Lisa’s design is the age restriction on contributions. Savers must stop paying in at age 50. While no one has yet reached that limit, it’s a design quirk that needs reform. Extending contributions to age 55 would be a sensible and fair adjustment.
With broader Isa changes under discussion this year, the moment is ripe to improve the Lisa. With the right reforms — scrapping the penalty, raising the property cap and extending the contribution window — the Lisa could evolve from a niche product into one with true mass-market potential.
Mark Fenlon is head of technical services at Transact
