The 2025 Budget confirmed major changes to how the UK government approaches savings and ISAs – and for anyone using or considering a Lifetime ISA (LISA), the implications are significant. The government will soon consult on replacing the LISA with a “new, simpler ISA product” designed for first-time buyers.
Here’s what we know — and what you should be thinking about.
What the Budget Says About the LISA and ISAs
- The Budget document confirms that the government will publish a consultation in early 2026 on a new ISA product for first-time buyers. Once launched, this new ISA would replace the existing Lifetime ISA.
- The overall ISA allowance rules remain in place for now: the standard adult ISA limit (£20,000) and LISA subscription limit (£4,000) are frozen until April 2031.
- For cash ISAs, the Budget introduces a change: from April 2027, the annual cash ISA limit will drop from £20,000 to £12,000 for most savers (those under 65).
Taken together, these moves signal that the government is rethinking how it supports first-time buyers and savers — moving away from the current LISA model.
Why the LISA Is Being Questioned
There are longstanding criticisms of the LISA — which likely influenced the Budget’s decision:
- The property price cap for using a LISA toward a home (currently £450,000) has become increasingly unrealistic in many parts of the UK.
- Many savers end up withdrawing funds for reasons other than a first home or retirement — triggering a heavy 25% penalty. In 2024/25 alone, savers faced around £102 million in withdrawal charges.
- Because of these flaws, the LISA is widely viewed as complex and inflexible — many first-time buyers may never benefit from the bonus or may risk losing part of their savings if circumstances change.
All of this underlines why the government has decided to rethink the scheme.
What Could the Replacement ISA Look Like — and What It Means for You
Based on the Budget announcement and public commentary, here’s what the future might hold:
- A simpler, more focused ISA for first-time buyers, with fewer penalties, fewer restrictions, and better alignment with modern house prices.
- Continuation of the standard ISA allowance (£20,000), preserving flexibility to split savings between cash, stocks & shares, or other ISA types.
- For savers relying on cash ISAs, the reduced £12,000 allowance from 2027 means less tax-free saving space — though those over 65 will keep the old limit.
What this might mean for you, depending on your circumstances:
- If you already hold a LISA – you may be allowed to keep it, but future contributions could be less attractive if a new ISA offers better terms.
- If you were planning to use a LISA for a first home – the upcoming replacement ISA may be more flexible and better suited to modern property prices.
- If you’re just starting to save – it could be wise to wait for the new ISA or at least diversify; heavy reliance on the current LISA might be risky.
- If you rely on cash ISAs – the lower tax-free allowance means you may need to reconsider savings strategy or shift some funds into other investment/savings accounts.
What You Should Do (Now)
Until any changes are finalised and legislation passed:
- Treat the LISA as uncertain – don’t depend on it as your sole home deposit or retirement vehicle.
- Consider diversifying your savings: standard ISAs, cash savings, or other investments may offer more flexibility.
- Keep an eye on the government’s consultation expected in early 2026 – that will provide clearer guidance on what the replacement ISA looks like.
- If you use a Cash ISA, plan around the upcoming £12,000 limit from 2027.
