A major shake-up of savings support for aspiring homeowners has been unveiled by the Government – but experts warn key details are missing.
The Treasury has launched a consultation on a new First Time Buyer ISA, which will eventually replace the much-criticised Lifetime ISA (LISA). Ministers say the move will simplify the system and end the controversial withdrawal penalties that have trapped thousands of savers. However, the Government has yet to reveal some of the most important features of the new scheme, including the size of the state bonus, annual contribution limits and the maximum property value that will qualify.
Rachel Vahey, head of public policy at AJ Bell, said the consultation had provided only the “broad shape” of the new product. She said: “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.”
The new account is designed solely to help people save for a first home and can only be used when buying with a mortgage. Unlike the Lifetime ISA, where the Government bonus is added as savings are built up, the proposed First Time Buyer ISA would pay the bonus only when the home purchase is completed.
Ministers believe this will eliminate the need for punitive withdrawal charges, which have seen many savers lose part of their own money when accessing funds for reasons other than buying a home or reaching retirement age.
But critics warn the change could leave buyers worse off. AJ Bell estimates that someone paying £4,000 a year into a Lifetime ISA over five years, assuming 4% annual growth after charges, could accumulate £28,165.
Under the proposed First Time Buyer ISA, assuming the same contributions and a 25% bonus paid only at the point of purchase, the saver would end up with £27,532 – around £630 less. Ms Vahey said: “Savers will lose out on the investment growth they could have earned on the bonus while building up their deposit.”
The Government also plans to abolish the upper age limit, meaning people will no longer have to open the account before turning 40.
That change has been welcomed by housing campaigners, who argue that rising property prices mean many people are buying their first home much later in life than previous generations. However, uncertainty remains over the future of the current £450,000 property price cap.
The cap has been frozen since the Lifetime ISA was introduced in 2017 and has increasingly become a barrier for buyers in parts of London and the South East.
Skipton Building Society, one of the UK’s biggest Lifetime ISA providers, said reform was overdue but warned the new scheme must reflect today’s housing market.
Jasvinder Gakhal, chief executive of money at Skipton Building Society, said: “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.”
He added: “The new scheme must keep pace with the market.”
According to Skipton Group’s Home Affordability Index, the average first-time buyer property is expected to exceed the current £450,000 cap in around one in 10 local authority areas across Great Britain by the end of next year.
The reforms also leave questions hanging over retirement saving. The Lifetime ISA was originally designed to serve two purposes: helping people buy their first home and providing a flexible retirement savings vehicle.
While existing Lifetime ISA holders will be allowed to continue contributing indefinitely, the Treasury has not yet explained what alternative retirement-saving options will be available to future self-employed workers who do not have access to workplace pension schemes.
Ms Vahey said: “The Treasury has been strikingly quiet on what this means for self-employed people saving for later life.”
Rachel Griffin, tax and financial planning expert at Quilter, said removing withdrawal penalties would be a significant improvement but warned ministers risk repeating past mistakes.
She said: “The proposed replacement for the much-criticised Lifetime ISA 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.”
She added that the current £450,000 house price cap had become “increasingly detached from reality” and warned that existing Lifetime ISA holders who have been priced out of eligible properties could still face penalties if they withdraw their savings to buy a more expensive home.
The consultation comes as ministers seek ways to help more young people onto the housing ladder while reducing the complexity that has dogged the Lifetime ISA since its launch nearly a decade ago.
