The Government is consulting on a new First Time Buyer ISA designed to help people save for a deposit without the withdrawal penalty attached to a Lifetime ISA.

That added flexibility could make the account easier to live with when plans change. The trade-off is that the government bonus would remain outside the account until a qualifying home purchase, so it wouldn’t earn interest or participate in investment growth while you save.

What the First Time Buyer ISA is designed to do

The proposed First Time Buyer ISA is a tax-free savings or investment account for UK residents aged 18 or over who are working towards their first home.

It would be available as either a cash account or a stocks and shares account. Interest, dividends and eligible investment growth within the account would remain tax-free.

The account is intended solely for buying a first home. It isn’t a general savings product, a pension substitute or a way to fund a cash property purchase. To receive the bonus, the buyer would need to use a legal mortgage, occupy the property as their main residence and have held the account for at least 12 months.

That distinction matters. The Lifetime ISA has two purposes – first-home saving and later-life saving. The proposed account removes the retirement element entirely.

It can help build a deposit, but it cannot solve mortgage affordability problems, weak credit history, insufficient income or a purchase above the eventual property price cap.

How the new account would work

Savers would pay money into the account within an annual subscription limit. That limit hasn’t yet been announced.

The Government would calculate a bonus as a percentage of the saver’s net contributions. Net contributions means the money paid in, less anything withdrawn before the house purchase.

Unlike the Lifetime ISA, the bonus wouldn’t be credited to the account during the saving period. It would become available when the saver was ready to complete an eligible purchase.

The proposed process is:

1. The saver opens a cash or stocks and shares First Time Buyer ISA.
2. They contribute within the annual limit.
3. The account remains open for at least 12 months.
4. When buying, their conveyancer confirms that the buyer, property and mortgage meet the rules.
5. The provider claims the bonus from HMRC.
6. The savings and bonus are released to the conveyancer for the purchase.

The purchase would normally need to complete within 90 days of the bonus being claimed. If the transaction fell through, the money and bonus would be returned through the account provider, without permanently removing the buyer’s ability to claim on a later purchase.

Why the withdrawal rules are changing

The withdrawal penalty is one of the most criticised parts of the Lifetime ISA.

A Lifetime ISA saver normally receives a 25% government bonus. However, withdrawing for a reason other than an eligible first-home purchase, reaching age 60 or terminal illness triggers a 25% charge on the amount taken out.

That charge doesn’t simply recover the bonus.

For example, someone who contributes £4,000 receives a £1,000 bonus, giving them £5,000. A 25% charge on the full £5,000 is £1,250, leaving £3,750. The saver has lost the £1,000 bonus and £250 of their own contribution, equivalent to 6.25% of the amount they originally saved.

Under the proposed account, savers could withdraw their own money without that additional charge. They would simply lose the potential bonus attached to the withdrawn contributions.

HM Treasury says unauthorised LISA withdrawals have been increasing and represented 8% of all accounts opened in 2024-25. It also reports that more LISA holders have lost part of their original savings through withdrawals than have used the product to buy a home.

Is removing the withdrawal penalty entirely good news?

It removes a significant financial risk, particularly for savers whose circumstances may change before they buy.

Someone facing redundancy, an unexpected bill or a delayed purchase could access their contributions without losing part of their own capital.

There is still a cost, though. Because the government bonus stays outside the account, it won’t earn cash interest or benefit from investment growth during the saving period. A LISA bonus paid into the account regularly can compound alongside the saver’s contributions.

How important that difference becomes will depend on the bonus rate, the length of the saving period and investment performance. For a short-term cash saver, the effect may be limited. For someone investing over several years, it could be material.

The figures that will determine whether it is worthwhile

Three central features remain undecided:

• the annual subscription limit
• the government bonus percentage
• the maximum eligible property price

The Treasury plans to announce these at a future fiscal event, taking account of market conditions and the public finances.

These figures work together. A more generous bonus may be paired with a lower contribution limit or property cap. A higher property cap may increase the cost to the Exchequer and leave less room for a larger bonus.

Until the final combination is known, it isn’t possible to say whether the First Time Buyer ISA will be more generous than the Lifetime ISA.

Will the property price cap still be £450,000?

That hasn’t been confirmed.

The Lifetime ISA currently has a £450,000 UK-wide property price cap. The Help to Buy ISA uses a £450,000 cap in London and £250,000 elsewhere.

The consultation says the caps applying to the new account, existing LISAs and Help to Buy ISAs would be aligned when the new limit is announced. It doesn’t say what that aligned figure will be.

An unchanged £450,000 cap may remain workable in many locations, but it could restrict buyers in London, the South East and other higher-value markets. The practical problem is that buyers can save within the rules for years, then lose access to the bonus if the suitable properties available to them exceed the cap.

How the First Time Buyer ISA compares with the Lifetime ISA

The proposed account offers more flexibility and a wider age range. The LISA offers something the replacement doesn’t: a bonus that enters the account while the saver is contributing and an alternative later-life use if the home purchase never happens.

Can I keep my existing Lifetime ISA?

Yes. Existing arrangements aren’t being closed immediately.

The consultation says people will continue to be able to open a LISA until the replacement becomes available. Existing holders will then be able to keep contributing under the current rules indefinitely.

A LISA couldn’t be transferred directly into the new account because the money in it has already received a government bonus. Allowing a transfer and a second bonus would duplicate the support.

However, the current proposal would allow someone to hold both accounts and use both towards the same property purchase. They wouldn’t be able to contribute to a LISA and a First Time Buyer ISA in the same tax year.

That creates a planning point for existing holders. Choosing which account to fund in a particular tax year may depend on the final bonus, limits and withdrawal terms rather than simply choosing the newer product.

What happens to Help to Buy ISA holders?

Help to Buy ISAs are closed to new applicants, although existing holders can continue saving under the scheme’s rules.

The Government proposes allowing Help to Buy ISA balances to be transferred into a First Time Buyer ISA, subject to the new account’s subscription limit. Existing Help to Buy ISA holders wouldn’t be required to transfer.

The right answer may depend on timing. Someone close to buying could find that remaining within the established Help to Buy ISA process is simpler. Someone with a longer saving period may value the proposed account’s contribution structure or investment choice.

What if I’ve used a LISA for retirement saving?

This is one of the areas where the proposed replacement is narrower.

A LISA can provide tax-free access from age 60, making it attractive to some self-employed people and others who want a flexible supplement to pension saving.

The First Time Buyer ISA would provide no retirement withdrawal route because its sole purpose is a first-home purchase.

Existing LISA holders could continue using their accounts, but future savers who don’t open one before the replacement arrives may need to consider pensions, ordinary ISAs or another arrangement instead.

That isn’t a like-for-like substitution. Pensions and ISAs have different tax treatment, access rules, employer contribution opportunities and effects on means-tested benefits.

A practical issue for stocks and shares savers

The proposed transfer rules contain a less obvious risk.

Transfers from stocks and shares ISAs into cash ISAs are due to be restricted under wider ISA reforms. The consultation proposes applying equivalent rules to the First Time Buyer ISA.

As drafted, someone with a stocks and shares First Time Buyer ISA may not be able to transfer it into a cash First Time Buyer ISA as their purchase approaches. The Treasury itself recognises that this could prevent savers from de-risking shortly before buying.

In practice, that means the investment decision can’t be separated from the expected purchase date. A saver who remains invested too close to exchange could face a market fall just when the deposit is needed.

They may instead need to sell investments and retain cash within the stocks and shares account, subject to the provider’s terms and the wider rules applying to cash-like holdings.

Myth-buster: “No withdrawal penalty means there’s no downside”

Removing the penalty makes the account more forgiving, but it doesn’t make withdrawals cost-free in every sense.

Money taken out would reduce the net contributions used to calculate the eventual bonus. Withdrawing £2,000 and replacing it later may also use part of a future subscription allowance, depending on the final flexible ISA and transfer rules.

There is also an opportunity cost. The delayed bonus doesn’t earn a return inside the account, and money held in investments can still rise or fall.

The new structure reduces one risk rather than removing every trade-off.

How this compares with the closest alternatives

Two savers can get very different outcomes

A buyer whose plans change

Sam expects to buy in three years but later needs £5,000 after losing work.

With a LISA, an unauthorised withdrawal would normally trigger the 25% charge. With the proposed First Time Buyer ISA, Sam could withdraw the £5,000 of contributions without that charge, although the amount would no longer count towards the future bonus unless rebuilt within the relevant limits.

A buyer investing for several years

Alex contributes regularly for eight years and experiences steady investment growth.

In a LISA, each government bonus can enter the account and remain invested. Under the proposed account, the future bonus sits outside the investment pot until purchase. Even with the same headline bonus rate, Alex could finish with less because the bonus itself hasn’t participated in the growth.

A buyer close to exchange

Priya holds a stocks and shares version but expects to buy within six months.

If transfers into a cash version are prohibited, she may need to sell investments within the existing account rather than move the account itself. Provider functionality, dealing time and settlement periods then become part of the house-purchase timetable.

Risks, limitations and practical boundaries

The proposal deals with the LISA withdrawal charge, but several wider risks remain.

Policy risk

The account is still under consultation. Limits, bonus rates, property caps and detailed regulations can change before launch.

Property eligibility risk

A saver may build a substantial balance but find that suitable properties exceed the final cap or that their purchase structure doesn’t satisfy the mortgage rules.

Market risk

A stocks and shares version could be unsuitable for money needed on a firm date. Investment values can fall, and the proposed transfer restrictions may complicate last-minute de-risking.

Delivery risk

The account relies on coordination between the buyer, provider, HMRC and conveyancer. Incorrect declarations, late claims or changes to the transaction may delay the release of funds.

Advice boundary

An account can improve a deposit, but it doesn’t determine whether a mortgage is affordable or appropriate. Mortgage eligibility, deposit requirements and monthly costs remain separate decisions.

Retirement-saving gap

Replacing the LISA with a home-only account removes a future route for new retirement savers. That matters most where the LISA was being used alongside, or instead of, pension saving.

What the evidence still doesn’t clearly tell us

The consultation leaves the account’s financial value unresolved because the bonus rate, annual contribution limit and property cap are still unknown.

It also doesn’t establish how many providers will offer cash and stocks and shares versions, what rates or investment ranges they will provide, or how quickly claims will be processed during live property transactions.

There is no clear answer yet on whether delaying the bonus will leave typical savers better or worse off after allowing for interest and investment growth. That will vary with saving periods, returns, withdrawals and the final bonus structure.

The proposed launch timetable also remains less definite than some early coverage suggests. The consultation says the Government wants the product available as soon as practicable and is asking providers about delivery times, rather than confirming an April 2028 launch date.

Frequently asked practical questions

Do I need to change my savings now?

No immediate change is required. The account remains a proposal, and the financial limits haven’t been announced. Existing LISA and Help to Buy ISA rules continue for now. Review the position when the Government publishes its consultation response and confirms the final product terms.

How much will the Government contribute?

The bonus percentage hasn’t been decided. The current LISA and Help to Buy ISA both use a 25% rate, but that doesn’t guarantee the same rate for the new account. The Treasury is considering the bonus alongside the contribution limit and property cap.

Could I withdraw money and pay it back later?

You could withdraw contributions without the proposed LISA-style penalty, but replacing them may be constrained by the annual subscription limit and final ISA rules. A withdrawal could therefore reduce the bonus available at purchase, even where the saver later rebuilds the account.

When does the consultation close?

The main GOV.UK consultation page was updated on 29 June 2026 and now gives a closing date of 18 August 2026. An HMRC newsletter published separately refers to 17 August, so anyone responding would be sensible to use the earlier date rather than leave it to the deadline.

Decide using the rules you have now

For the moment, the sensible approach is to keep saving under the products and rules already available rather than planning around an unfinished proposal. Once the bonus, contribution limit, property cap and launch arrangements are confirmed, you can compare the flexibility of the new First Time Buyer ISA with the compounding benefit and retirement option offered by an existing LISA.