The UK Treasury has launched a consultation on a new First Time Buyer ISA intended to replace the Lifetime ISA (LISA), but experts warn that the lack of key details and a proposed change in bonus payment timing could leave savers worse off, with AJ Bell estimating a potential shortfall of £630.
Key Details Missing from Consultation
The Treasury has outlined the broad structure of the new First Time Buyer ISA, which is designed solely to help people save for a first home and can only be used when buying with a mortgage. However, it has not yet revealed the size of the government bonus, annual contribution limits, or the maximum property value that will qualify. Rachel Vahey, head of public policy at AJ Bell, said the consultation had provided only the "broad shape" of the product, leaving crucial aspects uncertain.
Potential Financial Impact on Savers
Under the proposed scheme, the government bonus would be paid only when the home purchase is completed, unlike the Lifetime ISA where the bonus is added as savings are built up. AJ Bell estimates that someone paying £4,000 a year into a Lifetime ISA over five years, assuming 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 only at purchase, the saver would end up with £27,532 – around £630 less. Ms Vahey noted: "Savers will lose out on the investment growth they could have earned on the bonus while building up their deposit."
Positive Changes: Removal of Penalties and Age Limit
Ministers believe the new structure will eliminate the need for punitive withdrawal charges, which have seen many savers lose part of their own money when accessing funds for reasons other than buying a home or reaching retirement age. The government also plans to abolish the upper age limit, meaning people will no longer have to open the account before turning 40. That change has been welcomed by housing campaigners, who argue that rising property prices mean many people are buying their first home much later in life.
Concerns Over Property Price Cap
Uncertainty remains over the future of the current £450,000 property price cap, which has been frozen since the Lifetime ISA was introduced in 2017 and has increasingly become a barrier for buyers in parts of London and the South East. According to Skipton Group's Home Affordability Index, the average first-time buyer property is expected to exceed the current cap in around one in 10 local authority areas across Great Britain by the end of next year. 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."
Retirement Saving Questions Remain
The Lifetime ISA was originally designed to serve two purposes: helping people buy their first home and providing a flexible retirement savings vehicle. While existing Lifetime ISA holders will be allowed to continue contributing indefinitely, the Treasury has not yet explained what alternative retirement-saving options will be available to future self-employed workers who do not have access to workplace pension schemes. Ms Vahey said: "The Treasury has been strikingly quiet on what this means for self-employed people saving for later life."
Experts Warn of Past Mistakes
Rachel Griffin, tax and financial planning expert at Quilter, said removing withdrawal penalties would be a significant improvement but warned ministers risk repeating past mistakes. 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 added that the current £450,000 house price cap had become "increasingly detached from reality" and warned that existing Lifetime ISA holders who have been priced out of eligible properties could still face penalties if they withdraw their savings to buy a more expensive home.
The consultation comes as ministers seek ways to help more young people onto the housing ladder while reducing the complexity that has dogged the Lifetime ISA since its launch nearly a decade ago.
