The Government is set to scrap the Lifetime ISA (LISA) and introduce a new savings product designed specifically for first-time buyers.
Last November – at its Budget – the Labour Party said that the LISA wasn’t “working for everyone” and announced plans to launch a “simpler” ISA aimed at those buying a home for the first time.
It has now unveiled a consultation on plans for a First-Time Buyer ISA (FTB ISA), which is set to be the replacement.
The new product – projected to be launched in 2028 – will only be available to those saving for property – whereas the LISA also allows you to save for retirement.
Here are the details we know and those that are still up in the air.
How it differs from the LISA and Help To Buy ISA
The LISA allows people to save up to £4,000 a year and receive a 25 per cent top-up from the Government annually. You can open one if you’re between 18 and 40, and savers can only withdraw this money either to buy their first home, worth up to £450,000, or for retirement when they reach age 60.
If you withdraw for other reasons, you get hit with a penalty of 25 per cent, but this can amount to more than you put in.
To give an example of how this works, if you saved £1,000 and got a £250 bonus, you would have £1,250 total. If you then withdrew it and closed the account, the 25 per cent penalty would be £312.50. So you would get £937.50 back.
With the new FTB ISA, people will be able to open one at any age over 18, but will only get the bonus when buying a home on the exchange of contracts.
Savers will no longer be stung by hefty withdrawal penalties. If they withdraw money without buying a home, they won’t get the bonus, but they won’t face a penalty either.
There will be no age limit to when someone can open an FTB ISA, with savers needing to be 18 and over.
But the lack of annual payments means savers will receive less money, because they won’t be receiving interest each year on the bonus, as they do with the LISA.
What we still don’t know
There are still many details to the product that have not yet been announced such as whether the contribution limit will be £4,000 per year as it is with the LISA – or what the property price cap – which is £450,000 with the LISA – will be.
The Government has said it will align the cap so that whatever it opts for, the LISA cap will be increased too.
Though it is consulting on the cap, it may be similar to the FTB ISA, as it explains in its consultation document that keeping the cap would make sure the support “goes to people who need it most”.
Rachel Griffin, tax and financial planning expert at Quilter, highlighted how the £450,000 property price cap has remained unchanged since 2017 and does not reflect the reality of house prices in the UK today.
She said: “This has resulted in many people who have saved diligently, particularly those living in London and the south-east, being unable to use their LISA for the property they need without facing a penalty.
“This has undermined confidence in the product and added complexity. Unfortunately, this does not appear to have been addressed within the new product as yet, and even goes as far as suggesting that the existing cap is suitable.”
What it means for existing LISA and Help To Buy holders
If you already have a LISA, you can continue holding and contributing to it, and you will be able to receive the bonus on your money if buying a home or using it for retirement, but you will not be able to transfer your savings into the new FTB ISA.
The Government has confirmed that those with a Help To Buy ISA – an older version of the Lifetime ISA that was discontinued in 2019 – will be able to transfer funds into the FTB ISA, subject to subscription limits.
Alternatively, those who hold this kind of ISA can buy a home with it as long as they use it before 2029.
You can use money from both a LISA and an FTB ISA towards the same property purchase, but subscriptions will only be paid into one.
What it means if you’re using your LISA for a pension
If you are using a LISA to save for your retirement, you will be able to continue doing so under existing rules.
The launch of the FTB ISA will not affect you or your savings.
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