Rachel Reeves to replace Lifetime ISA with 'new, simpler' savings account after Budget overhaul

Industry specialists said the decision acknowledged longstanding concerns that the Lisa has struggled to meet both of its intended purposes.

They added that the consultation could set out a more focused approach to supporting deposit-building for first-time buyers.

The Lifetime ISA currently allows individuals to save up to £4,000 each year, with the Government adding a 25 per cent top-up worth as much as £1,000 annually.

Savers can use the product until they are 50 years old, and withdrawals are permitted either for buying a first home or for retirement after age 60.

Since its introduction in 2017, more than 314,000 first-time buyers have used the scheme to purchase a home.

Providers said the product has played a significant role in helping savers manage rising property prices.

Jen Lloyd, head of mortgage products and proposition at Skipton Building Society, said her organisation holds more than 160,000 Lisa accounts.

She said the product had "proved its value in unlocking affordability" for many households trying to enter the housing market.

However, industry concerns have grown around the £450,000 property price cap, which has remained unchanged since 2017 despite rising house prices in many regions.

Analysts said the cap has become particularly restrictive in London and the South East, where average first-time buyer properties now approach £500,000.

Richard Dana, founder and chief executive of Tembo, said: "Many diligent savers find they can't use their Lisa for a perfectly normal-priced property without triggering a penalty".

The withdrawal penalty remains one of the most contentious features of the scheme.

The 25 per cent charge applies to the full value of the account if savers withdraw funds for reasons other than buying a first home or retiring.

The penalty recovers the Government bonus but also reduces part of the saver’s own contributions, resulting in an effective loss of 6.25 per cent on the original deposit.

Industry experts have urged ministers to address this issue during the consultation.

Rachael Griffin, tax and financial planning expert at Quilter, said: "The Government should also look to reform the punitive 25 per cent withdrawal penalty which often punishes savers for accessing their own money by taking back not only the government bonus, but some of their own savings too".

David Hollingworth, associate director for communications at L&C Mortgages, said that while reclaiming the bonus was reasonable, the current system means "savers receive less back" than they paid in.

Some industry representatives said regional property price caps may be required to reflect market realities.

Mr Dana said any replacement should include "a price cap that reflects regional realities" and avoid penalising those withdrawing savings in emergencies.

The announcement has raised concerns about how existing Lifetime ISA holders will be treated.

Dan Coatsworth, head of markets at AJ Bell, said the move "raises more questions than answers and adds yet more confusion to the ISA landscape".

Mr Coatsworth said savers may be unsure whether those using the accounts for retirement will remain "stuck in a legacy account" or be allowed to transfer balances.

Analysts said clarity would be essential for the thousands of people using Lisas for long-term financial planning.

Ms Griffin said: "There will be questions marks over how and if existing Lisa holders will be affected, and the government will need to ensure they are not disadvantaged".

Industry groups are urging ministers to outline clear transition arrangements to protect savers who have already built up deposits or retirement funds in the scheme.

Providers said certainty would be especially important for the self-employed, who often rely on Lifetime ISAs as a core part of their retirement planning.

Self-employed workers do not benefit from workplace pensions or employer contributions through auto-enrolment.

The Lifetime ISA bonus has therefore served as an alternative route to building long-term savings.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said the consultation would be "worrying for those who rely on it for their retirement savings".

Carol Knight, chief executive of TISA, said Lifetime ISAs have provided the self-employed with "a simple, engaging way to build retirement savings."

She urged the Government to ensure that the reform process preserves essential features for this group.

Sarah Coles of Hargreaves Lansdown said self-employed workers "fall seriously short when it comes to pension contributions," making the consultation outcome particularly significant for their financial security.