Lifetime ISA Reform 2026: Should You Still Open One Before the New First-Time Buyer ISA?

The Lifetime ISA (LISA) is on its way out. On 23 June 2026 the government opened a consultation to replace it with a new First-Time Buyer ISA, expected to launch in April 2028 (GOV.UK). If you've been saving for a first home — or were about to start — you're probably wondering whether it's still worth opening a LISA in 2026.

Short answer: for most first-time buyers aged 18 to 39 buying a home costing £450,000 or less, yes — opening one now locks in the 25% government bonus under today's rules, and existing holders keep those rules indefinitely. If you're over 40, or the home you'll buy is likely to cost more than £450,000, waiting for the new account is the more sensible move. Here's the detail behind that.

What's actually changing

A Lifetime ISA is a savings or investment account for a first home or retirement. You can pay in up to £4,000 a year, and the government adds a 25% bonus — up to £1,000 a year — on what you contribute (MoneySavingExpert).

The government's plan, out for consultation until 18 August 2026, is to close the LISA to new savers and replace it with a First-Time Buyer ISA from April 2028. The key differences proposed so far:

• No upper age limit. The new account would be open to first-time buyers aged 18 and over, versus 18–39 to open a LISA today.
• Bonus paid at purchase, not during saving. The government top-up would arrive when you actually buy a qualifying home, rather than being added month by month.
• No early-withdrawal penalty. Because the bonus isn't paid until you buy, taking your own money out for another reason wouldn't cost you a penalty charge.
• Cash and stocks & shares versions, like the LISA.

Two important numbers are still undecided: the exact bonus rate and the property price cap. The consultation says both will be confirmed "at a future fiscal event" (Which?). So while the new account sounds friendlier, you can't yet compare it like-for-like against what a LISA gives you today.

Why the government is reforming it

The Treasury's own case is telling. It says the LISA tried to do two jobs at once — house deposit and retirement pot — and that its 25% penalty caught out a lot of savers. In 2024–25, unauthorised withdrawal charges were applied to 8% of all LISAs opened, and more holders lost part of their original savings than used the account to buy a home (GOV.UK consultation).

That penalty is the LISA's sharpest edge, and it's worth understanding before you open one.

The penalty that trips people up

Withdraw from a LISA for anything other than a first home under £450,000 or reaching age 60, and you pay a 25% government charge on the amount you take out.

It sounds like it just claws back the bonus. It doesn't. Because the charge applies to your whole pot, not just the top-up, you lose the bonus and about 6.25% of your own money (MoneySavingExpert).

A quick example. Say you pay in £4,000 and get the £1,000 bonus, giving £5,000. Withdraw that £5,000 early and the 25% charge is £1,250 — leaving you £3,750. You put in £4,000 of your own money and walk away with £3,750. That's the trap the reform is trying to fix.

The other catch is the £450,000 property cap, frozen since 2017. Buy a first home above that price and it counts as an unauthorised withdrawal — so you'd trigger the same penalty on money you saved specifically to buy a home. In parts of the country where starter homes have drifted past £450,000, that's a real risk.

Should you still open a LISA in 2026?

Here's the honest framing. Opening a LISA now isn't a "last chance" panic move — existing accounts aren't closing, and you'll be able to open one right up until the replacement launches. But because the government has said current holders can keep contributing under existing rules indefinitely, getting an account open in 2026 does something useful: it locks in today's terms while the new account's details are still unknown.

Opening one in 2026 likely makes sense if you:

• Are aged 18–39 (you must open a LISA before turning 40).
• Are a first-time buyer expecting to buy a home costing £450,000 or less.
• Won't need the money for anything other than the house or retirement — so the penalty is unlikely to bite.
• Want the 25% bonus working for you now, rather than waiting until April 2028.

Even opening a LISA with just £1 starts the clock: you must have held the account for 12 months before you can use it (bonus and all) towards a home. That alone is a reason not to wait if a purchase might be on the horizon.

Waiting for the new First-Time Buyer ISA may suit you better if you:

• Are over 40 and can't open a LISA anyway.
• Expect to buy above £450,000 — the new cap is expected to be reviewed, though nothing's confirmed.
• Value flexibility and are nervous about locking money behind a penalty.

LISA vs First-Time Buyer ISA at a glance

Sources: GOV.UK, Which?, MoneySavingExpert. Figures as of August 2026 — confirm current terms before opening any account.

Cash or stocks & shares LISA — and where else to save

If you do open a LISA, you'll choose between a cash version (a set interest rate, no market risk) and a stocks & shares version (invested, can rise and fall).

The rule of thumb hasn't changed with the reform: money you'll need within about five years — which describes most house deposits — generally belongs in cash, because a market dip right before you buy could shrink your deposit at the worst moment. A stocks & shares LISA makes more sense for a home that's a decade away, or for the retirement side of the account. Capital is at risk when you invest, and past performance doesn't guarantee future returns.

For money that isn't going into a LISA — savings above the £4,000 annual cap, or a shorter-term pot — a regular Cash ISA or Stocks & Shares ISA is the flexible home, with no age limit and no LISA-style penalty. A couple of options we've researched:

If you're weighing where to keep a deposit while you decide, our guide to the best Cash ISA rates walks through current easy-access options, and the Cash ISA allowance cut coming in 2027 is worth reading if you're a heavy cash saver. For the invested side, start with the best investing apps in the UK and our beginner ETF guide.

The bottom line

The Lifetime ISA is being replaced, but not overnight — and not in a way that punishes people who already hold one. If you're a first-time buyer under 40 buying a home within the £450,000 cap, opening a LISA in 2026 to lock in the 25% bonus is still a solid move, especially since a £1 opening deposit starts the 12-month clock. If you're over 40, or your future home is likely to cost more, the new First-Time Buyer ISA — penalty-free and age-open — is probably worth waiting for, once its bonus and cap are confirmed.

Whichever way you lean, keep house-deposit money you'll need within five years in cash, and don't lock money behind the LISA penalty that you might need for something else.

This is general information, not financial advice. The First-Time Buyer ISA is still at consultation stage and its terms could change. Do your own research and consider speaking to a qualified adviser about your situation.