- The Treasury has today published a consultation on the launch of a new ISA product to support savers to buy a first home in place of the Lifetime ISA
- The consultation document sets out proposed rules for the new First Time Buyer (FTB) ISA…
- …but crucially fails to confirm what the subscription limit, property price cap and level of government bonus will be set at
- It has also failed to set out how the self-employed could save for retirement once the option of taking out a Lifetime ISA has been removed for those who haven’t already opened one
- Lifetime ISA holders will also be allowed to save into the accounts in line with existing rules ‘indefinitely’
- The government believes the Lifetime ISA is too complicated, and too many people are paying withdrawal charges on unauthorised withdrawals
Rachel Vahey, head of public policy at AJ Bell, comments:
“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.
“Since its launch in 2017, the Lifetime ISA has helped thousands of young people take their first step onto the property ladder. But the product has never been perfect, and the withdrawal charge has caused real problems for savers who need to access their money for any reason other than buying a qualifying first home or reaching age 60.
“Moving away from an upfront bonus should make the system simpler. Paying the bonus only when someone buys their first home removes the need to claw money back through a withdrawal charge if the savings are used in a different way.
“But this simplicity comes at a cost. Savers will lose out on the investment growth they could have earned on the bonus while building up their deposit. For some first-time buyers, that could mean having less money available when they come to purchase a home.
“For example, someone paying in £4,000 each year for five years into a Lifetime ISA with a bonus added each year would have built up £28,165 assuming 4% growth net of charges. Under the FTB ISA, assuming the same terms including payments, and that a government bonus of 25% is added when buying the house, the ISA holder would only have built up £27,532.
“The Treasury will not allow current Lifetime ISA holders to transfer to the new FTB ISA. But both products will be allowed to be used towards the same purchase. This leaves Lifetime ISA holders potentially juggling two products ahead of their life-changing purchase.
“The Treasury has been strikingly quiet on what this means for self-employed people saving for later life. Those who already have a Lifetime ISA will be able to keep saving, but that does nothing for the thousands of self-employed workers and others without access to a workplace pension who may need a flexible retirement savings option in future.”
How will the new FTB ISA work?
“The proposed new FTB ISA will be designed to help people save towards buying their first home. It can only be used where the home is bought with a mortgage.
“Savers will receive a government bonus when they use the money to buy their first home. The bonus will be based on how much they have paid in, less any withdrawals, not on any investment growth. There will be no upper age limit, so people will never be too old to open or keep one.
“But the government has not yet confirmed some key details, including how much people will be able to pay in each year, the maximum property price that will qualify, or how generous the bonus will be.
“We do know that the new ISA will sit within the wider ISA rules. For example, money paid into the cash version of the FTB ISA will count towards the overall ISA allowance, and for under-65s the annual Cash ISA limit of £12,000 as well.
“The government also plans to apply anti-avoidance rules to stop people using the new ISA in ways it was not intended. That will mean a 22% charge on interest paid on cash held in the investment version of the FTB ISA, and not allowing 100% of the investment portfolio to be held in money market funds.
“People will also not be able to transfer money between a Lifetime ISA and FTB ISA. However, they will be able to use money from both accounts towards the same first home purchase.
“Transfers from a Stocks and Shares FTB ISA into a Cash FTB ISA will not be allowed either, whereas transfers from a Cash FTB ISA into a Stocks and Shares FTB ISA will be allowed. This puts it in line with intended rules published today regarding anti-circumvention of the new Cash ISA regime from April 2027.
“People will also be able to transfer money from FTB ISAs into a normal Stocks and Shares ISA, but not into a normal Cash ISA.”
