Lifetime ISA versus First Time Buyer ISA: which is the better option?

The government has unleashed details for yet another ISA that aims to help people purchase their first home. The new First Time Buyer ISA is once again trying to solve the problem of getting people onto the first rung of the property ladder, by providing incentives to save for their first deposit.

There are a lot of similarities with the existing Lifetime ISA. You can pay in up to £4,000 a year, you get a 25% government bonus, but you can only use it for a first home you’re buying with a mortgage and you must be 18 years old to open the account. There are also some key differences, so how does the new proposed First Time Buyer ISA stack up against the existing Lifetime ISA? And in a world where you could use both to fund the same property purchase, which is the better option?

Over the age of 40? First Time Buyer ISA is your only bet

The Lifetime ISA can be opened by people from their 18th birthday all the way up until they turn 40 years old, but once they hit their 40th birthday they can no longer open one. The First Time Buyer ISA won’t have an upper age limit – meaning that anyone over the age of 18 can open one. It means that for those over 40 who don’t already have a Lifetime ISA, the First Time Buyer ISA will be their only option.

Planning to save until you’re older? First Time Buyer ISA may be better

With the Lifetime ISA, as well as the age restriction on when you can open it, you can only pay into it until your 50th birthday. After that point, the money can remain in your account and continue to grow with interest or investment growth, but you can’t add to the pot. With the First Time Buyer ISA there won’t be the same restriction, meaning you can contribute to it indefinitely, with no upper age limit. In reality the majority of people will likely have bought their first home by the age of 50, but for older homebuyers the First Time Buyer ISA could give them more flexibility.

Want your bonus now or later? Take your pick

Both the ISAs have a 25% government bonus on the money paid into the accounts. But the key difference is that with the Lifetime ISA the bonus is paid when you pay money into to your account, while with the First Time Buyer ISA it’s paid when you withdraw your money from the account to buy a home.

The difference has no impact on your overall savings pot, assuming your contributions and net returns are identical. But it does mean that you don’t have to worry about the exit charge with the First Time Buyer ISA. With the Lifetime ISA, if you make a withdrawal that isn’t for your first home (or from the age of 60) you’ll face a 25% exit charge on any money you take out. It’s intended to reclaim the government’s bonus but in reality it also takes a bit of your original savings. With the First Time Buyer ISA, because the bonus isn’t paid until you buy a home, you can make withdrawals without any exit penalty. However, because the bonus is based on the account balance when you use it to buy a first home, prior withdrawals will reduce the amount that can be claimed.

Want more than £20,000 of government bonus? Lifetime ISA could be better

While the amount you can pay into both ISAs is the same – at £4,000 a year – and the government bonus for both is 25%, the bonus is capped with the First Time Buyer ISA but not with the Lifetime ISA.

With a Lifetime ISA you can claim up to £1,000 a year in government bonus but there is no overall cap – meaning that if you opened one when you’re 18 and paid the maximum in each year all the way through until you turn 50, you could get £32,000 in bonus money from the government.

With the First Time Buyer ISA the maximum bonus is capped at £20,000. It means that you can have deposit savings worth £80,000 before you max out the government bonus – which would add £20,000 onto that pot to take your savings to £100,000.

The reality is that most first-time buyers won’t hit either of these limits, having more modest deposit savings – the average Lifetime ISA contribution is closer to £2,500 a year. So, it’s only really an issue for those who either contribute large sums or plan to pay in over a long period.

Want to buy a property worth more than £450,000? Neither helps

Both ISAs have the same cap on the value of the property that you can buy with the account: £450,000. One of the big criticisms levelled at the Lifetime ISA is that this property price limit has been set since it launched and hasn’t increased, despite sizeable house price growth.

The government has not resolved that issue with the new ISA – sticking to the same £450,000 property limit. It means that if you’re buying in a more expensive part of the country or buying a bigger property as your first home, you could be priced out regardless of which you use. The good news is that thanks to a change in the Budget you can now withdraw money from the Lifetime ISA to buy a property worth more than £450,000 and you only face a 20% exit charge, rather than the previous 25%.

Already got a Lifetime ISA? You can use either

People with a Lifetime ISA already may be wondering whether they are better to switch to the new First Time Buyer ISA when it launches. The good news is that you can have both accounts, so you’re not prevented from opening the new account when it launches. However, you can’t transfer your existing Lifetime ISA savings across to the First Time Buyer ISA – so you may need to run both products together. You can only pay into one product each tax year – but you can use the money from both towards your deposit.

If you have a Help to Buy ISA the transition is a little easier – you can transfer your full Help to Buy ISA balance into a First Time Buyer ISA once it’s open. But you’ll have to remember the deadlines: the Help to Buy ISA scheme closes on 1 December 2030 and the new First Time Buyer ISA won’t open until April 2029 – giving you just under two years to make the move.

Want to start your deposit saving now? The Lifetime ISA is your only option

The new First Time Buyer ISA isn’t launching until April 2029 – so it’s not an option for more than two years. Savers wanting to start their deposit saving today and benefit from the government bonus can only use the Lifetime ISA, assuming they meet the opening criteria. The Lifetime ISA will remain open for new customers until April 2029 and even after that existing customers can carry on paying in.

Saving for retirement? The Lifetime ISA is the product for you

When the Lifetime ISA was launched in 2017, it was designed to help people get on the property ladder and save for retirement. On the retirement side, it particularly appealed to self-employed workers, who would usually miss out on the benefit of being auto-enrolled into a workplace pension as well as employer contributions. Those using the Lifetime ISA to save for retirement can do so either instead of, or alongside, a personal pension.

The 25% Lifetime ISA government bonus tops up contributions at the same rate as automatic pension tax relief for basic-rate taxpayers, albeit on payments up to a maximum of £4,000 a year made before their 50th birthday. And unlike a pension, where usually only 25% can be taken tax-free, once a Lifetime ISA holder hits the age of 60, they can access all their money free of tax and any government withdrawal charge. This includes any government bonuses, interest and investment growth accrued over the years.

The First Time Buyer ISA, due from April 2029, has no upper age limit for opening an account, and the 25% bonus will be paid on the balance on a qualifying first-time property purchase rather than on contributions as they go in. But crucially, it has no retirement option, so once the Lifetime ISA closes to new savers, the self-employed will lose a valuable way to boost their retirement pot.