Lifetime ISA in 2026: how to withdraw without the 25% penalty — and what the new First Time Buyer ISA means

The Lifetime ISA is the most generous savings account in the UK: the government adds a quarter to every pound you put in. But it has a trap that costs people their own money, and in summer 2026 the Treasury said the LISA will be replaced. Here is how it works, based on GOV.UK and HM Treasury documents.

What is a Lifetime ISA and how much does the government add?

You can open one from 18 until you turn 40 and pay in up to £4,000 a year until you are 50. The government adds a 25% bonus — up to £1,000 a year. Payments count towards the £20,000 annual ISA allowance. You can hold cash or stocks and shares, and returns are tax-free. You must be UK resident to open and pay into one.

When can you take money out without a penalty?

In three cases. First, buying your first home: the property costs £450,000 or less, at least 12 months have passed since your first payment, you buy with a mortgage and the provider pays the money straight to your conveyancer or solicitor. It must be your main home (not buy-to-let or a holiday home), and the purchase must complete within 90 days of the withdrawal. Since 6 April 2024 the bonus cannot be used if the mortgage comes from a relative or your spouse. Second, once you turn 60. Third, if you are terminally ill with less than 12 months to live. When the holder dies, the money is also paid out without a charge.

For newcomers: a first-time buyer is someone who has never owned a home anywhere — in the UK or abroad. A flat back home, even one you have sold, rules you out.

How much do you lose by withdrawing early?

The 25% charge applies to the whole amount you withdraw, not just the bonus, so it also eats into your own money. The GOV.UK example: you pay in £800, the government adds £200, the pot is £1,000. Take it all out and £250 is deducted, leaving £750 — £50 less than you put in. To receive a set amount you must withdraw more: to get £120 you need to take out £160. The Treasury says 8% of accounts opened in 2024-25 have already paid the charge, and more holders have lost part of their savings than have used the LISA to buy a home.

Is the Lifetime ISA being scrapped?

Yes, but not overnight. On 22 June 2026 HM Treasury opened a consultation on a new First Time Buyer ISA, to be offered in place of the LISA (it closed on 18 August). The key differences: no withdrawal charge at all, and the government bonus is paid only when you buy your first home with a mortgage, calculated on what you paid in rather than on growth. The contribution limit, price cap and bonus rate will be set at a future fiscal event — the next one is the Budget on 28 October.

If you already have a LISA: until the new account launches you can still open and pay into a LISA under the current rules — indefinitely, the Treasury says. You cannot transfer a LISA into the new account, but you can hold both and use both for the same purchase, paying into only one of them in any tax year. Help to Buy ISAs will be transferable into the new product.

How does a Lifetime ISA affect Universal Credit?

Money in a LISA counts as savings, like any other ISA. Below £6,000 it does not affect Universal Credit. Between £6,000 and £16,000 your payment is cut by £4.35 a month for every £250. Above £16,000 you cannot get Universal Credit. Withdrawing from a LISA to get under the limit is expensive: the 25% charge will almost certainly cost more.

What if you need the money urgently?

First, work out the real loss: 25% of whatever you take out. If the problem is day-to-day costs, it can make more sense to stop paying in — pausing has no penalty — and keep the money until you buy or turn 60. If you must withdraw, take only what you need allowing for the deduction, not the whole pot. For other help for first-time buyers, see our guide to Your First Home.