The 25 per cent penalty on unauthorised withdrawals from a Lifetime Isa will not apply in the first year of the product's life, the government has said.
The government said the move would stop people being hit with a penalty before they had received the 25 per cent government bonus.
Due to be launched in April next year, the Lifetime Isa allows people under 40 to save up to £4,000 a year, plus a 25 per cent government bonus, towards either a first home or retirement.
Those wanting to withdraw their money for neither of those purposes will be charged a 25 per cent penalty.
However, in parliament on Monday (12 December), Jane Ellison MP said the 25 per cent penalty would only come into effect in April 2018, a year after the product's launch.
That, she said, was because in the first year of the product's life, the 25 per cent bonus would be paid at the end of the year, rather than monthly.
Ms Ellison defended the penalty, saying reflected the "long-term nature of the product and ensures individual save into it for the intended purposes, protecting government funds and taxpayers’ money".
But she added: "In 2017-18 only the bonus will not be paid monthly as it will from April 2018, but will be paid as an annual bonus at year end.
"This could create a difficult case where people face a 25 per cent government charge up to 12 months before they receive the bonus.
"We’ve listened to representation and so to improve the product for consumers I can confirm there will be no government charge in 2017-18," she said.
Royal London's Steve Webb, a former pensions minister and prominent critic of the Lisa, criticised the government's move, saying it would add confusion.
"The new product, which is a complex hybrid between a pension and an Isa, is due to be implemented in just a few months’ time, and yet the government is still making up the rules as it goes along," he said.
"It is not too late for the government to admit that the Lisa risks undermining the real progress that has been made on getting young people saving through a workplace pension under automatic enrolment, and to reconsider the whole project."
Short of scrapping the Lisa altogether, he urged the government "at the very least" to hold off launching it until the roll out of automatic enrolment is complete.