The Government has announced plans to overhaul its main savings scheme for first-time homebuyers, but financial experts warn that key details remain unresolved and some savers could end up worse off.
The Treasury has launched a consultation on a proposed First Time Buyer ISA, which would eventually replace the Lifetime ISA. Ministers say the new account is intended to simplify the system and remove withdrawal penalties that have caused problems for thousands of savers. However, the consultation leaves unanswered questions about how generous the scheme will be and who will benefit most.
Change
Under the proposal, the First Time Buyer ISA would be designed solely to help people save for their first home and could only be used when buying a property with a mortgage. This marks a shift from the Lifetime ISA, which can also be used as a retirement savings vehicle.
A key difference is how the government bonus would work. With a Lifetime ISA, the bonus is added as savings are paid in. Under the new scheme, the bonus would only be paid at the point of purchase, when the property transaction is completed.
The Government argues this change would remove the need for withdrawal penalties, which currently apply when Lifetime ISA funds are taken out for non-qualifying reasons.
Gaps
Despite outlining the overall structure, the Treasury has not confirmed several core features of the new account. These include the level of the government bonus, the annual contribution limit, and the maximum property price that would qualify.
Rachel Vahey, head of public policy at AJ Bell, said the consultation provides only limited clarity. She said the proposals give the broad shape of the product but leave savers guessing about the most important details needed to judge whether it will offer better value than the Lifetime ISA.
Impact
AJ Bell analysis suggests that some first-time buyers could be financially worse off under the new design. A saver contributing £4,000 a year into a Lifetime ISA for five years, with annual growth of 4 percent after fees, could build a pot of £28,165.
Under the proposed First Time Buyer ISA, assuming the same contributions and a 25 percent bonus paid only at purchase, the final amount would be £27,532. That is around £630 less, largely because savers would miss out on years of investment growth on the government bonus.
Vahey said the change means savers would lose the compounding effect that currently boosts Lifetime ISA balances over time.
Access
One change that has been broadly welcomed is the plan to remove the upper age limit. At present, people must open a Lifetime ISA before turning 40. The new scheme would allow people to start saving later in life.
Housing groups say this better reflects today’s housing market, where many buyers are purchasing their first home well into their 40s due to high prices and deposit requirements.
Limits
Uncertainty also remains around the current £450,000 property price cap. The limit has been frozen since the Lifetime ISA launched in 2017 and has become increasingly restrictive, particularly in London and the South East.
Skipton Building Society has warned that the cap no longer reflects market conditions. Its Home Affordability Index suggests that by the end of next year, the average first-time buyer home could exceed £450,000 in around one in 10 local authority areas across Great Britain.
Pensions
The proposals also raise questions about retirement savings. The Lifetime ISA was originally designed to serve two purposes: helping people buy their first home and providing an alternative way to save for retirement.
While existing Lifetime ISA holders will be allowed to keep contributing, the Treasury has not yet explained what replacement options might be available for future savers, particularly self-employed workers who do not have access to workplace pensions.
Vahey said there has been little clarity on how the changes will affect people saving for later life outside traditional pension schemes.
Review
Other experts have welcomed the direction of travel but urged caution. Rachel Griffin, tax and financial planning expert at Quilter, said removing withdrawal penalties would be a significant improvement but warned that unresolved issues could create new problems.
She also noted that current Lifetime ISA holders who have been priced out of qualifying homes could still face penalties if they withdraw funds to buy a more expensive property.
The consultation comes as ministers look for ways to make home ownership more achievable while simplifying a system that has drawn criticism since the Lifetime ISA was introduced nearly a decade ago. Whether the new First Time Buyer ISA delivers meaningful improvement will depend on the details that emerge in the months ahead.
FAQs
What is the First Time Buyer ISA?
A proposed savings account to help people buy their first home.
Will it replace the Lifetime ISA?
Yes, it is intended to replace the Lifetime ISA.
How does the bonus work?
The bonus would be paid only when the home is purchased.
Why could savers lose £630?
They may miss out on investment growth on the bonus.
