The government has introduced First Time Buyer Isa schemes to replace the Lifetime Isa.
It is discussing a new product, which will be for first-time buyers only and not for the dual purpose of saving for retirement like the Lifetime Isa was.
The Lifetime Isa has come under fire, both for withdrawal penalties and a hefty price limit for first-time home buyers, both of which have limited its take-up.
Government talks say that this new product will be aimed at first-time buyers of all ages from 18 and up.
Instead of charging early withdrawal penalties, the program will pay savers a bonus for exchange contracts when the funds are used to buy a first home.
Savers will be able to contribute up to an unspecified annual limit, which will count towards their total ISA allowance.
The savings can be used to buy any property in the UK up to a certain amount, which has not yet been decided, as long as it is bought with a loan.
Buying a home with cash alone is not allowed.
Both Cash and Stocks versions will be available. The government bonus will be based on total contributions, after any withdrawals, rather than the final account balance.
Tax and financial planning expert Rachael Griffin says “The proposed changes to the much-criticised Lifetime ISA mark a clear step towards creating a savings product that better reflects the realities facing home-owners, but there are still issues to be resolved.
“Importantly, the consultation suggests there should be a shift that would see the government’s bonus paid when the funds are used to buy the property, not first.
“By doing this, it removes the need for what is currently a revocation offense with a huge penalty that not only sees the government’s bonus returned, but also people’s hard-earned savings.
“Thousands have been charged for access to their LISA when they make unauthorized withdrawals, often because their financial circumstances have changed unexpectedly and they have had to tap into their savings.
“Allowing people to access their money when they need it, while still being encouraged to save for a first home deposit, would be the best design.
“Equally important is the decision to remove the upper age limit.
“The age of first-time buyers has been steadily increasing, yet the Lifetime ISA closed the door on those who didn’t get on the property ladder before they turned 40.
“An age-definite modified product can reflect the modern housing market.”
But Griffin warns uncertainty about where the property price will be placed risks undermining productivity.
He says the £450,000 LISA cap has not changed since it was introduced in 2017 and is becoming increasingly unrealistic in many parts of the country.
Griffin says: “This has resulted in many people who have actively saved, especially those living in London and the South East, being able to use their LISA where they need to without facing a penalty.
“This has undermined confidence in the product and added complexity. Unfortunately, this does not seem to be fixed within the new product yet, and goes so far as to suggest that the existing cap is appropriate.
“The Treasury is negotiating the cap, as well as the review of the annual enrollment limit, so time will tell if more of a cap is brought to the table.”
Griffin highlights additional complexities that can cause rescue difficulties.
He says: “Existing LISAs cannot be transferred to the new FTB ISA, but the Help to Buy ISA can.
“You can hold one of them and both can be used to buy the same home, but the subscription can be paid in one place.
“This, combined with the price of property in LISAs, means that those who have actively saved in a LISA but have been priced out will still be penalized if they use a LISA to buy their first home.”
