Industry experts are divided on the government’s plans to replace the Lifetime ISA (LISA) with a First Time Buyer ISA (FTB ISA).
The government launched a consultation on the ISA reforms yesterday (23 June) that described the LISA as “not working well for many’ with the number of unauthorised withdrawals increasing annually and more LISA holders losing some of their original savings than used it to purchase a house.
The FTB ISA is designed to help people save towards buying their first home using a mortgage with savers receiving a government bonus when they use the money to buy their first home.
In keeping with broader anti-circumvention ISA rules announced by HMRC, new anti-avoidance measures will mean a 22% charge on interest paid on cash held in the investment version of the FTB ISA, while it will not be permitted to hold 100% of the investment portfolio in money market funds.
Rachel Vahey, head of public policy at AJ Bell, said scrapping the upfront bonus LISA holders were granted could prove detrimental.
“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.”
Vahey also took aim at the lack of details in the proposals.
“[The] consultation gives us the broad shape of the new ‘First Time Buyer ISA,’ but leaves us guessing on some of the most important aspects,” she said. “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.”
Brian Byrnes, director of personal finance at Moneybox, warned the FTB ISA could be too complex.
“We are left with more questions than answers around how savers will navigate this new product in practice, and the administrative burden placed on providers and conveyancers to ensure compliance in how it has been used is onerous and anti-business,” he said.
“The current proposal is more complicated, more restrictive and potentially less valuable than the options many savers already have available.
“We fully support the government’s continued focus on helping first-time buyers overcome the significant challenges of saving for a deposit. However, the more detail about the new product that emerges, the stronger the case becomes for improving the existing Lifetime ISA rather than replacing it with something demonstrably inferior.”
Rebecca William, financial planning divisional lead at Rathbones, said the retirement savings element of the LISA would be missed as it provided under‑40s with another tax‑efficient route to build savings for later life.
“One of its key advantages was that withdrawals from age 60 are completely tax free – a notable contrast to pensions, where typically only 25% can be taken tax-free. Yet from our experience, the product often flew under the radar and was poorly understood by many savers.”
She added: “While a simpler savings vehicle is a step forward, it doesn’t change the fundamental challenge facing first-time buyers. Younger generations are contending with a double squeeze of high rents and elevated living costs, making it increasingly difficult to build a deposit. As a result, the traditional milestone of homeownership is drifting into the mid‑thirties for many.”
Rachael Griffin, tax and financial planning expert at Quilter, welcomed the proposals and said the later bonus would “remove the need for what is currently a highly punitive withdrawal charge”. She also applauded the removal of 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,” she said.
However, she said the house price cap of £450,000, which has been unchanged since the LISA first launched in 2017, 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,” she said.
“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.”
