The UK government has come under renewed fire for its handling of the Lifetime ISA (LISA), after a cross-party Treasury Committee and leading financial voices called for urgent reforms to a scheme described as both a boon and a burden for young savers. On September 11, 2025, the government responded to the Treasury Select Committee’s June report on LISAs, declining to commit to immediate changes despite mounting evidence of the scheme’s complexity and the punitive impact of its withdrawal penalties.
At the heart of the debate is the LISA’s original purpose: to help people aged 18 to 39 save for their first home or for retirement, with the government offering a 25% bonus on savings of up to £4,000 a year. That’s potentially £1,000 a year in free money towards a first-time deposit or nest egg. For many, it’s a game-changer. Yet, as Martin Lewis, founder of MoneySavingExpert.com, put it bluntly on BBC Radio 5 Live, “Lifetime ISAs are a brilliant, brittle, and broken product.”
The government’s latest response, delivered by Economic Secretary to the Treasury Emma Reynolds, acknowledged the importance of the LISA in supporting homeownership and retirement savings. Reynolds stated, “The government recognises the importance of the LISA in supporting people to achieve the aspiration of homeownership, or to build up savings for later life.” She added that the government “carefully considered important issues highlighted by the committee in its report and we will consider the recommendation in future development of the policy.”
Despite these assurances, the Treasury Committee and industry experts argue that the scheme’s flaws are too significant to ignore. Chief among their concerns is the withdrawal penalty that applies when savers use their LISA funds to buy a home costing over the £450,000 cap. If the property exceeds this limit—even by a single pound—savers face a 6.25% penalty on their own money. That’s not just the loss of the government bonus; it’s a direct hit to the saver’s original contributions.
Martin Lewis didn’t mince words: “The real problem on the housing element is you have to be buying a property under £450,000, which is fine for most of the country – but people in the southeast of England struggle. And the really big problem is that if you take the money out to use for a property, and it isn’t a qualifying property – let's say it's £451,000 – you have to pay a fine to the Government. A fine, effectively, of 6.25% of your money. So you've saved £10,000, they want £625. You don't get back all your money, never mind not getting the bonus. Now, I think that is a perverse incentive. It puts people off from saving in the first place, even people it won't affect, because they are scared of that withdrawal penalty.”
This penalty, coupled with the £450,000 property price cap that has remained unchanged since 2017, is increasingly out of step with the UK’s rising house prices. According to government research, the withdrawal fine deters one in five people from opening a LISA. It’s a statistic that has fueled calls for reform from all corners, including AJ Bell, Moneybox, and The Investment and Savings Alliance (TISA).
Rachel Vahey, head of public policy at AJ Bell, captured the mood of frustration: “The Treasury Committee is clearly frustrated that the government has put the Committee’s Lifetime ISA recommendations on the back burner, choosing instead to progress on ISA reform at its own rate. Rather than a ‘wait and see’ response, the Treasury Committee wanted to see action and a plan for reform put in place. But the government has thwarted those wishes.”
Vahey and others argue that reverting to the penalty system used during the pandemic—when the charge only matched the original bonus received, rather than dipping into savers’ own funds—would be a fairer approach. “Even the best-laid plans often go awry and it is unfair to punish people with an exit charge that goes beyond simply recovering the government-funded bonus,” she said.
Brian Byrnes, head of personal finance at Moneybox, emphasized the LISA’s positive impact but believes its full potential is yet to be realized. “Nearly a quarter of a million first homes have already been purchased with the help of a LISA, and the latest HMRC data shows that 1.3 million people are currently saving or investing through one,” Byrnes noted. “With a few simple updates to the product rules, which have not [been] reviewed since its launch in 2017, many more young people could benefit in the years ahead.”
HMRC’s own research recently found that 42% of those not currently holding a LISA would be most likely to open one if the rules were changed so that original savings were not lost when paying the withdrawal charge. Byrnes also suggested an annual review of the property price cap to ensure it keeps pace with changing market conditions.
Carol Knight, CEO of TISA, echoed these sentiments, highlighting that while LISAs are a positive tool for encouraging young people to save, there are areas ripe for improvement. “We believe the LISA is a positive tool, encouraging thousands of young people to save for their first home and providing a useful retirement option, especially for the self-employed. As highlighted in the committee’s report, there are several areas where the LISA could be improved upon and we look forward to working with industry and the government to shape the LISA into a product that supports the financial wellbeing of all consumers, regardless of where they are in their financial journey.”
The government, for its part, maintains that the withdrawal charge and property cap are necessary to ensure the LISA is used for its intended purpose. It has committed to “work with industry on ways in which it could improve its messaging” and to keep all aspects of the LISA policy under review. However, it rebuffed calls to exclude LISA savings from Universal Credit means-testing, arguing that “Universal Credit is there to support people who do not have sufficient resources available to meet their basic needs. While it is important to protect the incentive to save for customers on low earnings, people with substantial capital should take responsibility for their own day-to-day support.”
The Treasury Committee’s recommendations also included using income distribution impact assessments to evaluate whether the LISA is effectively targeting those who need financial support, and considering the future of the product if it fails to meet its objectives. The government responded that it collects comprehensive data on LISAs and will use this to inform future policy decisions.
Dame Meg Hillier MP, chair of the Treasury Select Committee, made her disappointment clear: “The Government has taken some steps towards improving the LISA, but I do not believe it has gone far enough. The LISA is a confused product that requires reform. The Government has an opportunity at the Budget to think again on the LISA for would-be first-time buyers and those saving for retirement alike.”
With the next Budget set for November 24, 2025, all eyes are on Chancellor and policymakers to see whether these calls for reform will finally be heeded. For now, the Lifetime ISA remains a product full of promise, but also pitfalls—a lifeline for some, a source of frustration for others, and a policy puzzle yet to be solved.
