HMRC has confirmed it will scrap the retirement savings element as well as removing the need for a withdrawal chargefrom the Lifetime ISA, with its proposed replacement now designed to support only first-time buyers.
According to HMRC’s newsletter, the new ISA will pay the government bonus only when a property is purchased rather than on each payment made.
The update follows the Autumn Budget announcement that the government would consult early this year on a replacement ISA product and comes amid long-standing criticism of the Lifetime ISA’s withdrawal charge.
At the moment, Lifetime ISAs can only be opened by those aged 18 to 39 and offer a 25 per cent government bonus on contributions. But savers face a 25 per cent charge if funds are withdrawn for non-qualifying purposes, including use in later life rather than for a property purchase.
HMRC says Lifetime ISAs can continue to be opened under the existing rules until the replacement product launches, and account holders can keep saving into their Lifetime ISA indefinitely.
AJ Bell head of public policy Rachel Vahey says: “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.
“The return to the help-to-buy model – the predecessor of the Lifetime ISA – should also be cheaper for the government. However, potential homeowners lose out on the investment growth earned on the bonus during the years they save for their first house. That might mean having less money to buy the home of their dreams.
“The government will soon consult on what the new house-buying ISA will look like. It needs to design the transition to the new product with the best interests of those who currently are investing in a Lifetime ISA in mind. It should be made easy for these people to continue to buy a house with their Lifetime ISA if they want, or to transfer their investment to the new ISA product without incurring an additional 6.25 per cent charge on their savings.
“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 – who publish their interim report later this year – to come up with a cunning plan to help these groups save for retirement.”