Labour to scrap pension bonus in new Lifetime Isa
New ‘simpler’ product designed specifically for first-time buyers with no withdrawal penalties
27 January 2026 5:10pm GMT
Related Topics
Labour is set to scrap the option to save for retirement from its replacement for the Lifetime Isa.
The new savings product will only be available for first-time buyers and will no longer pay the government’s 25pc bonus on a monthly basis. The top-up will instead be paid at the point of a first-time home purchase – meaning savers will not benefit from interest payments or investment returns over the duration they hold the Isa.
Savers can still open a Lifetime Isa under the current model until the new product launches in April 2028. The existing Lifetime Isa applies a tax-free bonus of 25pc to savings of up to £4,000 a year, to a maximum total of £5,000 saved annually.
Under the existing rules, funds can be withdrawn to buy a first home worth up to £450,000 or for retirement after the age of 60, with a withdrawal penalty applied for any other use. The current penalty reclaims both the government bonus and 6.25pc of the original capital invested or saved by the account holder.
A Treasury spokesman told The Telegraph it was “consulting on a new and improved product, specifically designed to support first-time buyers and without penalty for withdrawals”.
The new product will not carry a withdrawal penalty but it is not known whether the property value threshold will be changed.
Plans for a replacement to the Lifetime Isa began at the November Budget, with Rachel Reeves promising a “simpler” product.
A review by the Treasury Select Committee last year criticised the Lifetime Isa and described the penalty as a “perverse incentive” that penalised savers.
In wider Isa reforms, Ms Reeves also cut the amount savers under 65 can hold in cash from £20,000 to £12,000 from April 2027.
Since then, HMRC has said that it will punish savers who hold “cash-like” investments in their stocks and shares Isa.
David Horowitz, head of financial planning at Gerald Edelman, said: “If investment growth ultimately isn’t allowed, the majority of people will be disincentivised to use this as a product. The whole point of an Isa is tax-sheltered investment growth.”
Rachael Griffin, of wealth manager Quilter, warned that savers could be giving up years of potential investment growth on their funds.
She said: “Trying to make one product serve both first-time buyers and retirement savers has never really worked in practice. The Lifetime Isa’s dual purpose has long added unnecessary complexity and uncertainty for savers.”
Mr Horowitz explained that the £450,000 cap in particular was a significant issue as it is difficult to find properties in that price range in the south of England.
He said: “An increased cap would make the Lifetime Isa more attractive. I don’t see why there would be a cap other than for political reasons.”
A Treasury spokesman said: “We recognise that the Lifetime Isa is not working for everyone, particularly when people’s circumstances change. That is why we intend to consult on a new and improved product, specifically designed to support first-time buyers and without penalty for withdrawals.”
View this Telegraph (UK) article CLICK HERE
Media Air Base, LLC 
Leave a comment