The Government has launched a consultation on a new First Time Buyer ISA, which will replace the Lifetime ISA (LISA). However, critics warn that the change could leave savers worse off, with AJ Bell estimating a potential loss of £630 over five years.
Key Details Still Unknown
Rachel Vahey, head of public policy at AJ Bell, said the consultation provided only the "broad shape" of the new product. She stated: "Today's consultation gives us the broad shape of the new 'First Time Buyer ISA', but leaves us guessing on some of the most important aspects." The Government has not disclosed the size of the state bonus, annual contribution limits, or the maximum property value eligible.
How the New ISA Works
The First Time Buyer ISA is exclusively for first-time home purchases with a mortgage. Unlike the Lifetime ISA, which adds the government bonus as savings accumulate, the new ISA pays the bonus only when the home purchase is completed. Ministers believe this eliminates harsh withdrawal penalties that have affected many savers.
Potential Financial Impact
AJ Bell estimates that someone paying £4,000 a year into a Lifetime ISA over five years, with 4% annual growth after charges, could accumulate £28,165. Under the proposed First Time Buyer ISA, with the same contributions and a 25% bonus paid at purchase, the saver would end up with £27,532 – around £630 less. Ms Vahey explained: "Savers will lose out on the investment growth they could have earned on the bonus while building up their deposit."
Changes to Age Limits and Property Caps
The Government intends to scrap the upper age limit, allowing people to open the account after turning 40. This has been welcomed by housing campaigners, as many now buy their first home later in life. However, uncertainty remains over the future of the £450,000 property price cap, which has been frozen since 2017 and has become an obstacle for buyers in London and the South East.
Industry Reactions
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." He added: "The new scheme must keep pace with the market." According to Skipton Group's Home Affordability Index, the average first-time buyer property is expected to exceed the £450,000 cap in about one in 10 local authority areas by the end of next year.
Retirement Savings Concerns
The Lifetime ISA also served as a retirement savings option. While existing holders can continue contributions, the Treasury has not clarified alternative provisions for self-employed workers without workplace pensions. Ms Vahey noted: "The Treasury has been strikingly quiet on what this means for self-employed people saving for later life." Rachel Griffin, tax expert at Quilter, said removing withdrawal penalties is an improvement but cautioned that ministers risk repeating previous errors. She stated: "The proposed replacement marks a clear step towards creating a savings product that better reflects realities, but there are issues still to be ironed out."
