Martin Lewis has warned anyone using a Lifetime ISA (LISA) to save for their first home about an upcoming change that could impact their savings. Earlier this year, the Government announced proposals for a new First-Time Buyer ISA (FTB ISA) designed to replace the current LISA scheme.
This new savings product isn't set to arrive for a while yet, with current plans suggesting it'll launch from April 6, 2029. However, in the latest edition of his newsletter, the Money Saving Expert (MSE) founder urged savers to consider their options — and consider opening a LISA before it's too late.
What happens to LISAs when the FTB ISA arrives?
Once the FTB ISA is introduced, Martin explains that LISAs will close to new applicants, 'but will still continue to work for those who have already opened them.' With that in mind, it may be worth starting a new account now (even if you only deposit £1) to ensure you don't miss out. But not before weighing up the pros and cons of both the LISA and its successor.
Like the LISA, the FTB ISA is designed to help first-time buyers to get on the property ladder by boosting their savings with a bonus upon purchasing a home. According to Martin, these new accounts won't have a maximum age limit, which means anyone can apply, as long as they're over 18. Crucially though (and as its name suggests) any money saved will need to be used to cover a first home purchase, so if you've ever had a mortgage before, you won't qualify.
Key differences between LISA and FTB ISA
Martin also explained that the bonus will be capped at £20,000, which will be calculated based on the amount of money inside the account when you come to buy and includes any interest you've accrued. This, in his view, is a 'big improvement on the original proposal, where the bonus would've only been paid on what you'd contributed.'
There are some issues; for one, while you will be able to transfer a Help to Buy ISA (the scheme that predated the LISA) into a FTB ISA, you can't transfer LISA savings. 'You will be able to get a first-time buyer's bonus on both a LISA and a FTB ISA, though you can't contribute to both in the same tax year,' Martin adds.
LISA vs FTB ISA at a glance
The LISA: Is open for applications now, and will close to new applicants from April 2029. Is open to people between 18 and 39. Has a property price cap of £450,000 (with a 20% penalty for buying a property worth more than this amount). Interest is paid monthly, up to a maximum of £1,000 (until the age of 50). Cannot be transferred into a FTB ISA. Has a maximum bonus of £32,000 (if the account is opened at 18, although no bonuses will be paid out until the account has been open for at least one year). Can be used for retirement savings or a house deposit.
The new FTB ISA will: Open for applications from April 2029. Be available to first-time buyers over 18. Allow a maximum deposit of £4,000 per year, with a 25% bonus given (so up to £1,000 per year). Allow funds to be transferred from Help To Buy ISAs, but not LISAs. Have a property price cap of £450,000. Have a maximum bonus of £20,000. Be allowed in conjunction with the LISA, with first-time buyer bonuses dished out on both.
More LISA changes afoot
As part of the Autumn Budget, chancellor John Healey also tweaked the LISA in a big way, reducing the penalty given to anyone purchasing a home for more than £450,000. Before now, the fine for accessing the money to buy a property worth more than this was 25% — a figure has now been dropped to 20%.
This, in Martin's view, means the LISA is 'now far less of a gamble', as well as a better reflection of the current state of the housing market. Martin has long taken issue with this penalty, since the maximum threshold hasn't been increased since the LISA was first introduced almost 10 years ago. Naturally, since then, housing costs have increased.
He wrote: 'My issue has been that first-time buyers who saved in LISAs just as the state encouraged them to, but who then got priced out of the market, were outrageously forced to pay the state what feels like a 6.25% fine to access their money in the way the state intended. 'Since last Thursday, for those buying properties over £450,000, the penalty is reduced to 20%, so you get back what you put in, plus interest, you just don't get the bonus.'
Should you get a LISA or wait for the First-Time Buyer ISA?
What you should do in light of these changes all depends on your situation. If you're planning to buy your first home, opening a LISA now — and even sticking just £1 in — gets the ball rolling on your savings. In this case, you'll also be able to open a FTB ISA when it launches in April 2029; you just won't be able to pay into both within the same tax year.
However, if you're not sure whether you'll buy a home with your savings, or know you'll be buying somewhere worth more than £450,000 MSE recommends weighing up your options before putting any money into a LISA. Alongside the penalties explained above, keep in mind that any withdrawals you make before age 60 face a penalty charge of 25%, which can do a bit of damage to your pocket — or potentially leave you less than you paid in in the first place.
In a YouTube video discussing the topic, Martin summarises: 'My rule for any 18 to 39-year-old who doesn't have a Lifetime ISA? Put £1 in. 'If you're a first-time buyer, it means the clock is ticking. 'If you're not a first-time buyer and you've already bought a house, you can use it for retirement savings. 'If you put £1 in now and open it now, you won't be able to after April 2029, but if you've got the facility open, then maybe in 10 or 15 years time, you'll go, "ooh, actually, that is a good vehicle for my retirement savings. 'So, for the sake of a quid, you're just buying yourself a facility.'
