The treasury has published a consultation that gives us the broad shape of the new ‘First Time Buyer ISA' (FTB) but leaves us guessing on some of the most important aspects. There is still no detail on the level of government bonus, subscription limits or property price cap, making it difficult to judge whether this new product will be a meaningful improvement for aspiring homeowners.
The First Time Buyer ISA will replace the Lifetime ISA, which was introduced in 2017 and 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 not said 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 that begins April 2027.
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. 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.
Rachel Vahey: Head of Public Policy
Rachel is AJ Bell's Head of Public Policy. She helps financial advisers and planners understand the changing pensions and savings environment, as well as how new legislation and regulation affects them and their clients.
Rachel...
