The Government has launched a consultation on a new First Time Buyer ISA, set to replace the Lifetime ISA (LISA), but experts caution that critical details remain unclear and savers could lose out financially.
Key Features of the Proposed First Time Buyer ISA
The Treasury's consultation outlines a savings account exclusively for first-time homebuyers, accessible only when purchasing with a mortgage. Unlike the LISA, where the government bonus is added as savings accumulate, the new ISA would provide the bonus only when the property purchase is finalised. Ministers believe this will eliminate harsh withdrawal penalties that have forced many savers to forfeit their own funds when withdrawing for non-housing purposes or before retirement.
However, critics warn this change could leave buyers worse off. AJ Bell calculates that a person contributing £4,000 annually into a LISA over five years, with 4% yearly growth after fees, could amass £28,165. Under the proposed ISA, with identical contributions and a 25% bonus paid at purchase, the saver would finish with £27,532 – approximately £630 less. Rachel Vahey, head of public policy at AJ Bell, said: “Savers will lose out on the investment growth they could have earned on the bonus while building up their deposit.”
Removal of Age Limit and Property Price Cap Concerns
The Government also intends to scrap the upper age restriction, meaning people will no longer need to open the account before their 40th birthday. This change has been welcomed by housing campaigners, as rising property prices mean many people buy their first home later in life. However, uncertainty remains over the existing £450,000 property price threshold, which has not changed since the LISA was launched in 2017 and has become a barrier for buyers in London and the South East.
Jasvinder Gakhal, chief executive of money at Skipton Building Society, said: “This consultation is a step in the right direction. Removing the withdrawal penalty, scrapping the upper age limit and reviewing the price cap are all the right calls to create a simpler, more flexible product that works for modern savers.” He added: “The new scheme must keep pace with the market.” According to Skipton Group's Home Affordability Index, the typical first-time buyer property is projected to surpass the £450,000 threshold in about one in 10 local authority districts across Great Britain by the end of next year.
Retirement Savings Implications
The LISA was originally designed to serve two purposes: helping people buy a first home and offering a flexible retirement savings option. While current LISA holders can continue contributing without time limits, the Treasury has not clarified what alternative retirement-saving solutions will be available for future self-employed people who lack workplace pension access. Ms Vahey said: “The Treasury has been strikingly quiet on what this means for self-employed people saving for later life.”
Expert Reactions and Next Steps
Rachel Griffin, tax and financial planning expert at Quilter, said removing withdrawal penalties is a substantial improvement but warned ministers risk repeating past errors. She said: “The proposed replacement for the much-criticised Lifetime ISA marks a clear step towards creating a savings product that better reflects the realities facing aspiring homeowners, but there are issues still to be ironed out.” She noted that the £450,000 property price cap has become “increasingly detached from reality” and cautioned that current LISA holders priced out of qualifying homes could still be penalised if they withdraw funds to buy a more expensive property.
The consultation comes as the Government seeks to help more young people onto the property ladder while addressing the complexity that has plagued the LISA since its introduction nearly a decade ago.
