The government has launched a consultation on a new First Time Buyer ISA, which would replace the Lifetime ISA and remove some of the features that have attracted criticism since its introduction.
The proposed product forms part of the government’s wider ambition to support more households into home ownership and would be offered in place of the Lifetime ISA (LISA) once implemented.
Among the key changes under consultation are the removal of the current withdrawal penalty structure and the upper age limit, while the government is also seeking views on the future of the £450,000 property price cap.
PROGRESS
Rachael Griffin, tax and financial planning specialist at Quilter, said the proposals represented progress but warned that important issues remained unresolved.
She said: “The proposed replacement for the much-criticised Lifetime ISA (LISA) 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.
“Importantly, the First Time Buyer (FTB) ISA consultation suggests a shift that would see the government bonus paid when the funds are used to purchase a property, rather than up front. In doing so, it removes the need for what is currently a highly punitive withdrawal charge that sees not only the government bonus clawed back, but some of people’s hard-earned savings too.
“Thousands of savers have been charged for accessing their LISA for an unauthorised withdrawal, often because their financial circumstances changed unexpectedly and they needed to dip into their savings. Allowing people to access their money when needed, while still being incentivised to save towards a deposit for a first home, would be a much better design.
“Equally important is the decision to remove the upper age limit. The average age of a first-time buyer has been consistently on the rise, yet the Lifetime ISA effectively shut the door on those who did not get onto the property ladder prior to turning 40. A reformed product with no age limit would reflect a more modern housing market.
LIMITATIONS
“However, there are still some limitations. The house price cap of £450,000 has been unchanged since the LISA first launched in 2017 and has become increasingly detached from reality in many parts of the country. 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. The Treasury is consulting on the cap, alongside considerations on the annual subscription limit, so time will tell whether a more generous cap is brought to the table.
“In addition, existing LISAs cannot be transferred to the new FTB ISA, but a Help to Buy ISA can be. You may hold one of each and both can be used to purchase the same home, but subscriptions can only be paid into one.
“This, combined with the property price cap on LISAs, means those that have saved diligently into a LISA but have been priced out will still receive a penalty if they use their LISA to purchase their first home.
“The existing LISA attempted to serve two distinct goals – saving for retirement and saving for a first home – but failed to meet either effectively.
“It is vital that the final FTB ISA design avoids simply recreating the same barriers and confusion that have undermined confidence in the Lifetime ISA.”
Skipton Building Society, one of the largest providers of Lifetime ISAs, also welcomed the consultation while calling for the final product to reflect changing housing market conditions.
STEP IN THE RIGHT DIRECTION
Jasvinder Gakhal, CEO, Money at Skipton Building Society, said: “Skipton Building Society was the first provider in the UK to offer the cash Lifetime ISA in 2017 and, today, remains one of the largest LISA providers with over 160,000 LISA savers.
“The LISA has helped over 314,000 first-time buyers secure a home of their own, showing how targeted savings support can unlock affordability.
“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.
“But the detail now matters. The Skipton Group Home Affordability Index shows the average first-time buyer home will exceed the current cap in around 10% of local authority areas across Great Britain by the end of 2027. The new scheme must keep pace with the market.
“We look forward to working with government to ensure the new ISA delivers for first-time buyers and our members, including those with existing LISA savings.”
The consultation will determine the final design of the proposed First Time Buyer ISA, including whether changes are made to the property price cap and annual subscription limits before the product is introduced.
