Lifetime ISA update as Labour presses ahead with 'new and improved' account without withdrawal penalty

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First-time buyers could soon be able to withdraw their savings without being hit with the current 25 per cent penalty

First-time buyers could be handed a major boost under plans to overhaul the way they save for a home.

The Government is working on a new Lifetime ISA designed to remove some of the restrictions that have frustrated savers.

Prime Minister Andy Burnham and Chancellor John Healey remain committed to introducing the "new and improved" account, with Treasury officials continuing to develop the plans, the i Paper reported.

The replacement was first proposed under former Chancellor Rachel Reeves and would be designed specifically to help people save for their first home.

Under the plans, the Government bonus would be paid when someone buys their first property, rather than being added to their savings each year.

Unlike the existing Lifetime ISA, savers would also be able to withdraw their own money for other purposes without facing a financial penalty.

The proposed account would also remove the current upper age restrictions on opening and contributing to a Lifetime ISA.

Under the current system, people must open a Lifetime ISA before they turn 40 and can only continue contributing until they reach 50.

Savers can put away up to £4,000 each year, with the Government adding a 25 per cent bonus. This means someone contributing the full amount can receive an extra £1,000 from the Government each year.

However, the money is generally intended to be used either to buy a first home or for retirement after turning 60.

Savers who withdraw their money for other reasons normally face a 25 per cent charge.

The way the penalty is calculated means they can end up receiving back less than they originally paid into the account if their circumstances change.

A Treasury spokesman confirmed that officials are continuing to work on a "new and improved product" to replace the Lifetime ISA.

The spokesman said: "We recognise that the lifetime ISA is not working for everyone, particularly when people's circumstances change.

"That is why we have consulted on a new and improved product, specifically designed to support first-time buyers and without penalty for withdrawals."

Ms Reeves launched a public consultation on the proposed ISA in one of her final acts as chancellor at the end of June. That consultation closed last month.

Crucial details are expected to emerge at the Budget on October 28, with the consultation stating that further information would be announced "at a future fiscal event".

Several important questions remain unanswered, including the annual savings limit, the size of the government bonus, and the maximum property price that will qualify.

The current lifetime ISA has a £450,000 property cap, which locks out some first-time buyers in the most expensive parts of the country.

Some experts have raised concerns about the decision to pay the bonus only when a property is purchased, rather than topping up savings annually as the lifetime ISA does.

They argue that a delayed reward is less effective at encouraging regular saving habits. Savers would also lose out on the benefits of compounding, potentially requiring them to contribute for a longer period to build the same deposit.