The government’s plans to replace the Lifetime ISA with a new First Time Buyer ISA have been welcomed by financial services firms, although industry figures have warned that savings products alone will not solve the affordability challenges facing aspiring homeowners.
Under government proposals published for consultation, the new account would be focused exclusively on helping people buy their first home, removing the retirement savings element of the Lifetime ISA and scrapping penalties for those who withdraw funds for other purposes.
Instead, savers would receive a government bonus only when money is used towards the purchase of a first home with a mortgage.
Supporters of the reforms argue that the changes would simplify the savings landscape for first-time buyers and remove some of the complexity and criticism associated with the Lifetime ISA. However, industry representatives have cautioned that high house prices and deposit requirements remain the biggest barriers to homeownership, despite efforts to improve access to savings support.
Rebecca William, financial planning divisional lead at Rathbones, said: “A new First Time Buyer ISA could mark a welcome shift towards simplicity in a space that has often felt unnecessarily complicated. The Lifetime ISA tried to serve two masters – helping people save for a home and for retirement – and in doing so it often created confusion rather than clarity.
“A more focused product that is solely geared towards getting on the housing ladder should be easier to understand and use in practice, particularly as it removes the withdrawal penalty that proved so contentious with the LISA.
“However, this comes at the expense of the Lifetime ISA, which did offer under‑40s another tax‑efficient route to build savings for later life. One of its key advantages was that withdrawals from age 60 are completely tax free – a notable contrast to pensions, where typically only 25% can be taken tax-free. Yet from our experience, the product often flew under the radar and was poorly understood by many savers.”
Williams said pensions would continue to be the primary vehicle for retirement saving for most people, arguing that the benefits of tax relief, employer contributions and long-term compounding make them difficult to replicate through alternative savings products. However, he cautioned that simplifying savings options alone would do little to tackle the underlying affordability challenges facing first-time buyers.
He continued: “While a simpler savings vehicle is a step forward, it doesn’t change the fundamental challenge facing first-time buyers. Younger generations are contending with a double squeeze of high rents and elevated living costs, making it increasingly difficult to build a deposit. As a result, the traditional milestone of homeownership is drifting into the mid‑thirties for many.
“That in turn is placing growing strain on the Bank of Mum and Dad, with many parents stepping in to help their children onto the ladder – often at the expense of their own financial plans. These pressures are particularly acute for the sandwich generation, who are balancing day‑to‑day costs while supporting both children and ageing parents. Our research shows that 60% expect to delay retirement as a result.”
The HomeOwners Alliance also welcomed the consultation, saying the current framework no longer reflects the realities facing today’s first-time buyers.
“Our research shows that 1.9 million aspiring homeowners do not believe they will follow in the footsteps of their homeowning parents. That underlines just how important effective support for first-time buyers is – and why this scheme needs to work for people across the whole country.
“Removing the upper age limit is also sensible. First-time buyers are getting older, and the current rules are increasingly out of step with today’s housing market.”
But Higgins said her organisation is “alarmed” that the £450,000 property price cap may be left untouched.
“It has not changed since 2017 and is now badly outdated, particularly in London and the South East,” she explained. “The whole point of this product is to help first-time buyers across the country. Yet those buying in the most expensive markets arguably need the most support, not a scheme that penalises them for purchasing an average-priced home in their area.
Higgins added: “This is a well-intentioned reform, but unless the cap is reviewed, it risks fixing one unfairness while leaving another firmly in place. The Treasury should update the cap now and future-proof the scheme by ensuring it rises in line with house prices, rather than allowing it to become outdated again.
“First-time buyers need a product designed for the housing market of the future, not one based on prices from nearly a decade ago.”
Skipton Building Society is also calling for the replacement product to reflect increasing house prices.
Jasvinder Gakhal, chief executive officer at Money at Skipton Building Society, said: “Skipton Building Society was the first provider in the UK to offer the cash Lifetime ISA in 2017 and, today, remains one of the largest LISA providers with over 160,000 LISA savers. The LISA has helped over 314,000 first-time buyers secure a home of their own, showing how targeted savings support can unlock affordability.
“This consultation is a step in the right direction. Removing the withdrawal penalty, scrapping the upper age limit and reviewing the price cap are all the right calls to create a simpler, more flexible product that works for modern savers.
“But the detail now matters. The Skipton Group Home Affordability Index shows the average first-time buyer home will exceed the current cap in around 10% of local authority areas across Great Britain by the end of 2027. The new scheme must keep pace with the market.
“We look forward to working with government to ensure the new ISA delivers for first-time buyers and our members, including those with existing LISA savings.”
View the First Time Buyer ISA consultation here.
