The Government is reportedly set to scrap the option to save for retirement in its replacement product for the Lifetime ISA.
Currently, savers can use a Lifetime ISA to buy their first home or save for later life, with individuals able to contribute up to £4,000 tax free each year until the age of 50. The Government will add a 25% bonus to the savings, up to a maximum of £1,000 per year.
However, in last year’s Autumn Budget, the Chancellor said they were working on replacing the Lifetime ISA with a new, simpler product, with the replacement set to launch in April 2028.
It is widely understood that the new savings product will only be available for first-time buyers and the 25% government bonus will no longer be paid on a monthly basis but at the point of purchase. While this is designed to simplify the ISA system for consumers, it means savers will no longer be able to benefit from interest on the bonus amount.
In doing so, the Government would also remove the exit penalties which currently apply to Lifetime ISAs and have attracted widespread criticism.
It is not known whether the Government will also change the property limit when the new product is introduced. Under current rules, a Lifetime ISA can be used to buy a house worth up to £450,000, however, concerns have been raised that rising property prices means this figure is not sufficient for some parts of the country, particularly London.
Rachel Vahey, head of public policy at AJ Bell, said: “Since its launch in 2017, the Lifetime ISA has helped thousands of young people get a step on the property ladder. But it’s not without its flaws so it’s no surprise the Government is going to replace it with a different model.
“Paying an upfront bonus means having to claw it back if it’s not used in the intended way, and it’s this withdrawal charge that has caused a lot of the problems. It’s far easier to get rid of an upfront incentive and go back to giving a bonus only when a house is bought.
“But by only focusing on helping those buying a house, the Government is leaving fewer options for those who might use a Lifetime ISA to save for retirement. Self-employed individuals and others without access to a workplace pension can keep saving if they already have a Lifetime ISA. But that doesn’t help the thousands of people who need a solution in the future.
“Instead, we are relying on the Pension Commission to come up with a cunning plan to help these groups save for retirement.”
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