The Government has revealed it is to scrap the option to save for retirement in its replacement for the Lifetime ISA.

HMRC’s new savings product will only be available to first-time buyers and will no longer pay the Government’s 25% bonus on a monthly basis.

In the Budget last November, the Government confirmed it was intending to consult on a new ISA product early this year.

This change, which forms part of the Treasury’s wider efforts to simplify the ISA system for consumers, would mean the bonus will be given when a person buys a house, rather than on each payment made.

Head of public policy at AJ Bell, Rachel Vahey, said that the Lifetime ISA had not been without its flaws, and that it was “no surprise” the Government plans to replace it with a different model.

“Paying an upfront bonus means having to claw it back if it’s not used in the intended way, and it’s this withdrawal charge that has caused a lot of the problems,” Vahey commented. “It’s far easier to get rid of an upfront incentive and go back to giving a bonus only when a house is bought.

“The return to the help-to-buy model – the predecessor of the Lifetime ISA – should also be cheaper for the Government. However, potential homeowners lose out on the investment growth earned on the bonus during the years they save for their first house. That might mean having less money to buy the home of their dreams.”

Vahey also warned that by only focusing on those using a Lifetime ISA to buy a house, HMRC would be leaving fewer options for those who might use a Lifetime ISA to save for retirement.

She added that the Government needs to design the transition to the new product with “the best interests of those who currently are investing in a Lifetime ISA in mind”.

“It should be made easy for these people to continue to buy a house with their Lifetime ISA if they want, or to transfer their investment to the new ISA product without incurring an additional 6.25% charge on their savings,” she added.

“But by only focusing on helping those buying a house, the government is leaving fewer options for those who might use a Lifetime ISA to save for retirement. Self-employed individuals and others without access to a workplace pension can keep saving if they already have a Lifetime ISA. But that doesn’t help the thousands of people who need a solution in the future.”

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