Everything we all know in regards to the new Lifetime Isa: Should you open one?

If a bank offered you a 25 pc boost to your savings, you’d likely think it was too good to be true.

But that’s precisely what is on offer from the Government for those who save into a tax-free account known as a Lifetime Isa (Lisa).

More than 1.5 million savers hold one of these accounts, which have helped many young people get on to the property ladder.

Now it’s set for a big revamp and the Treasury is rewriting the rules. Here’s everything we know.

On the ladder: Lifetime Isas have become a popular way to save for a first home 

What are Lifetime Isas?

The Lisa was created in 2017 to help young people buy their first home. You can deposit up to £4,000 a year into one of these accounts, which counts towards your £20,000 overall annual Isa limit.

For every pound you save, the Government will top it up by 25 pc, up to a maximum of £1,000 a year. Bonuses are paid out every month.

In addition to the bonus, interest earned on savings, as well as capital gains on investments, are tax-free – as with other Isas.

At a glance, a Lisa might sound like the go-to choice for aspiring home buyers. But it has a list of strict requirements.

Firstly, you must be between age 18 and 39 to open one. You can keep your Lisa open into your 40s but, once you turn 50, you can’t pay in any more money. Neither will you get the 25 pc Government bonus. Your savings will still earn ­interest or investment returns.

The major caveat – you can only take money from your Lisa to buy your first home, or when you reach the age of 60, as a retirement fund.

If you use it for any other reason, a 25 pc penalty is applied on the full amount, clawing back the Government bonus and some of the money you saved, potentially swiping thousands of pounds from your pot. It equates to a 6.25 pc charge on your own money.

Say you pay in £100, which is topped up by the Government to £125. If you later take that money out, you will be charged £31.25. This charge also applies if you try to use the money within 12 months of opening the account – even if it’s to buy your first home.

You also can’t use the pot if you are buying a home for more than £450,000. Many buying in London have struggled to find homes below this threshold.

These rigid rules have frustrated first-time buyers saving into a Lisa and industry groups, who have lobbied for changes. Criticism of the product triggered Chancellor Rachel Reeves in her November Budget to announce the Lisa will be scrapped for a simpler first-time buyer Isa.

What will change?

Existing Lisas will not change, but a new product is expected to launch in April 2028, after which new Lisas cannot be opened.

The Government has not yet revealed if the £450,000 property price cap will be removed from the new product, if the bonus will stay at 25 pc or if the £4,000 annual contribution limit will change. 

But we do know that it will only be ­available to first-time buyers – not to those hoping for a Government bonus on their retirement savings.

The bonus is set to be paid only when a buyer comes to purchase a home, rather than monthly.

Should I still open one?

Anyone who has a Lisa and has paid in at least £1 before the replacement launches will be able to keep paying into it indefinitely.

Experts predict there will be a way to merge the old Lisa with the new one.

Rachael Griffin, of wealth ­manager Quilter, says: ‘Is the new version going to be as attractive as the current Lisa? In some ways, yes and in other ways no. If you weren’t planning on taking money out early, you may be worse off.’

That’s because the bonus will no longer be paid monthly and ­benefit from compounding over time. It will just be paid once before you cash it in.

Alice Haine, of investment platform Bestinvest, adds: ‘For first-time buyers the sensible option would be to start saving to make the most of the bonus and, hopefully, migrate it across in future.

‘To miss out on that 25 pc bonus if you’re buying within the £450,000 cap would be silly.’