The Government has launched a consultation on a new ISA
A significant overhaul of savings assistance for prospective homeowners has been announced by the Government – but experts caution that crucial details remain unclear.
The Treasury has opened a consultation on a new First Time Buyer ISA, which will ultimately replace the heavily-criticised Lifetime ISA (LISA). Ministers claim the change will streamline the system and eliminate the controversial withdrawal penalties that have ensnared thousands of savers. However, the Government has not yet disclosed some of the most vital aspects of the new scheme, including the size of the state bonus, annual contribution limits and the maximum property value that will be eligible.
Rachel Vahey, head of public policy at AJ Bell, said the consultation had provided only the “broad shape” of the new product. She said: “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.
“Without detail on the level of government bonus, subscription limits or property price cap, it is difficult to judge whether this new product will be a meaningful improvement for aspiring homeowners.”
The new account is intended exclusively to assist people saving for a first home and can only be used when purchasing with a mortgage. Unlike the Lifetime ISA, where the Government bonus is added as savings accumulate, the proposed First Time Buyer ISA would pay the bonus only when the home purchase is completed.
Ministers believe this will do away with the need for harsh withdrawal penalties, which have left many savers losing a portion of their own money when accessing funds for reasons other than purchasing a home or reaching retirement age.
However, critics caution that the change could leave buyers worse off. 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, assuming the same contributions and a 25% bonus paid only at the point of purchase, the saver would end up with £27,532 – around £630 less. Ms Vahey said: “Savers will lose out on the investment growth they could have earned on the bonus while building up their deposit.”
The Government also intends to scrap the upper age limit, meaning people will no longer be required to open the account before turning 40.
This move has been welcomed by housing campaigners, who argue that soaring property prices mean many people are purchasing their first home far later in life than previous generations. Nevertheless, uncertainty remains over the future of the existing £450,000 property price cap.
The cap has remained frozen since the Lifetime ISA was launched in 2017 and has increasingly become an obstacle for buyers across parts of London and the South East.
Skipton Building Society, one of the UK’s largest Lifetime ISA providers, said reform was long overdue but warned the new scheme must reflect today’s housing market.
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 average first-time buyer property is expected to exceed the current £450,000 cap in around one in 10 local authority areas across Great Britain by the end of next year.
The overhaul also raises concerns about retirement savings. The Lifetime ISA was originally conceived to fulfil two functions: assisting people in purchasing their first home and offering a flexible retirement savings option.
While existing Lifetime ISA holders will be permitted to continue making contributions indefinitely, the Treasury has yet to clarify what alternative retirement-saving provisions will be accessible to future self-employed workers who lack 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.”
Rachel Griffin, tax and financial planning expert at Quilter, said removing withdrawal penalties would be a considerable improvement, but cautioned that ministers risk repeating previous 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 further noted that the current £450,000 house price cap had become “increasingly detached from reality” and cautioned that existing Lifetime ISA holders who have been priced out of eligible properties could still face penalties if they withdraw their savings to purchase a more expensive home.
The consultation arrives as ministers look for ways to help more young people get onto the property ladder while cutting through the complexity that has plagued the Lifetime ISA since it was launched almost a decade ago.