How the New 2028 ISA Differs from the LISA: The Give and Take
The transition from the Lifetime ISA to the First-Time Buyer (FTB) ISA represents a fundamental pivot in Treasury policy. By removing the “exit tax,” the government has addressed the primary criticism of the LISA: the 25% penalty that often saw savers lose a portion of their original capital. However, this availability comes with a heavy dose of “sacrifice.”
The most immediate budgetary blow is the loss of compound growth. Under the current LISA, the 25% bonus is paid monthly, allowing that “free” money to earn interest or investment returns over several years. In contrast, the 2028 replacement pays the bonus only at the point of purchase. For a long-term saver, this represents thousands of pounds in lost potential growth.
Furthermore, the “dual-purpose” nature of the LISA is dead. By scrapping the LISA retirement bonus, the government has taken away a valuable tool for the self-employed and gig economy workers. For those unable to access workplace pensions, the LISA worked well as a flexible retirement safety net. Industry experts, including those at AJ Bell, warn that this shift risks creating a “lost generation” of savers.
Without the capacity to pivot savings toward retirement at age 60, freelancers and contractors may find themselves with a “zombie product” that lacks a long-term purpose. While the FTB ISA simplifies the route to home ownership, it undeniably weakens the retirement outcomes for millions.
What This Means for Current LISA Holders
If you currently hold a Lifetime ISA, there is no need to panic. HMRC has confirmed that existing accounts will not be forcibly closed. For now, you can continue contributing and receiving your 25% monthly bonus under the current rules. However, the 2026 announcement signals a slow transition toward “zombie status” for the LISA.
While existing holders can technically keep their accounts “indefinitely,” no new LISAs specifically for retirement will be permitted after the April 2028 switchover. This causes a significant dilemma for the self-employed and homeowners in their 30s who have relied on the LISA as a flexible pension alternative. Without a clear retirement-focused successor, your existing pot may eventually feel like a “lost” product, disconnected from the modern savings landscape.
To support this transition, the government is expected to introduce a 2027 Migration Window. This period will allow savers to transfer funds into the new penalty-free FTB ISA without incurring the current 6.25% capital charge.
“It should be made easy for people to transfer their investment to the new product without being penalised,” notes Rachel Vahey of AJ Bell.
While this migration provides flexibility for those whose home-buying plans have changed, it does not address the needs of retirement savers. If you are using your LISA for retirement, it is important to review your strategy before the 2028 deadline.
Strategic Advice: Should You Open a LISA in 2026?
With the Lifetime ISA set to be scrapped in 2028, you might wonder if it is still worth opening one today. The answer depends entirely on your goal. If you are a first-time buyer planning to purchase within the next two years, the current LISA remains an excellent option. Because the 25% bonus is currently paid monthly, your savings benefit from immediate “interest on the bonus”, which is a perk the 2028 replacement will eliminate by paying only upon completion.
However, for those focused on retirement savings, it is advisable to consider other options. The 2025 Treasury Committee report described the LISA as “complex” and noted that its dual-purpose design led some to unsuitable investment strategies. With the retirement bonus removed in the new model, the LISA will no longer serve as a pension alternative.
If you are self-employed or under 40 and saving for retirement, consider switching to a Self-Invested Personal Pension (SIPP). A SIPP offers higher tax relief for top-rate taxpayers and is not affected by the 2028 changes. As the LISA becomes focused solely on housing, it is important to update your retirement strategy accordingly.
Frequently Asked Questions
Q: Is the £450,000 property price cap being increased? As of the 2026 Treasury consultation, the government has not confirmed an increase to the £450,000 limit. This is still a major point of contention; industry experts, including Martin Lewis, argue the cap is outdated and unfairly penalises buyers in high-value areas like London and the South East. Pressure is mounting for the 2028 replacement to feature a more realistic threshold.
Q: Can I still get my 25% bonus this year? Yes. The current LISA rules remain in full effect until the formal launch of the replacement in April 2028. You can still contribute up to £4,000 annually and receive your monthly 25% government top-up, which will continue to earn interest or investment growth within your account for the time being.
Q: What happens if I need my money for an emergency in 2026? Until the First-Time Buyer ISA launches, the current 25% withdrawal penalty will continue to apply. If you withdraw funds for reasons other than a qualifying home purchase or retirement, you will lose the government bonus and approximately 6.25% of your original savings. Penalty-free withdrawals will only be available once the new product is introduced in 2028.
While the 2028 replacement aims to simplify the housing market, the 2027 Migration Window is the government’s proposed “escape hatch” for current Lifetime ISA (LISA) holders. This interim phase is designed to prevent your savings from being trapped in an outdated product as the rules shift.
Summary: Key points about the proposed migration:
- Penalty-Free Exit: The main purpose of the 2027 window is to allow savers to transfer LISA funds into the new First-Time Buyer ISA without incurring the current 25% withdrawal charge, which typically results in a 6.25% loss of your own capital.
- Protection of Past Bonuses: The migration is expected to protect the 25% bonuses you have already earned. Once moved to the new product, these funds will no longer be subject to future withdrawal penalties, offering greater flexibility if your plans change.
- Interest Cut-Off: Transferring to the new product during this window means adopting the completion-only bonus model. You will no longer receive monthly bonuses, which ends the opportunity to earn compound interest on the government’s contributions.
- No “Retirement” Carry-Over: If you migrate your funds, you permanently lose the option to use them for retirement. For those using the LISA as a pension, the migration window may not be a solution, but a deadline to reconsider your strategy.
