Treasury confirms scrapping of Lifetime ISA but industry questions remain
The government has confirmed it is replacing the hotly debated Lifetime ISA with a new product aimed solely at first time buyers, but industry figures are questioning the new framework.
In a consultation published on Tuesday, the government confirmed the new product, dubbed the ‘First Time Buyer ISA’, (FTB ISA) will only be available to those over 18 who are looking to buy their first home.
The government conceded that the Lifetime ISA (LISA) was “not working well for many” leading to the shakeup.
The product will be available as a cash or stocks and shares ISA, with it also wiping out the withdrawal penalty, which has long caused major uproar among industry figures.
Under LISA rules, if funds are removed for an unauthorised purchase or for properties over the cap a holder is subjected to a 25 per cent penalty on the withdrawal.
The 25 per cent bonus will instead be paid at the point of purchase, rather than when money is added to the account, and will only be paid on the amount contributed to the account, meaning it is excluded on both interest and investment gains.
Acting on discontent
The Treasury’s decision to end the use of the LISA comes after admitting that the withdrawal charge was “putting off some savers”, preventing many from getting the “support they are entitled to”.
The Treasury said: “We recognise the Lifetime ISA is not working for everyone.”
The FTB ISA will also have no upper age limit and can only be used when the home is bought with a mortgage, which has been welcomed by the industry as reflecting a “more modern housing market”.
Brits will not be able to transfer money between a LISA and the new product, with the FTB ISA also counting towards the overall ISA allowance, as well as the new £12,000 cash ISA ceiling for under 65s from April 2027.
People can use both an existing LISA and a FTB ISA to purchase their first property.
But the government failed to provide detail on the level of the government bonus, subscription limits or property price cap.
Rachel Vahey, head of public policy at AJ Bell, noted that “it is difficult to judge whether this new product will be a meaningful improvement for aspiring homeowners” without knowing this information.
Other problems persist
While industry figures widely welcomed the move away from the LISA, they have argued that there are still issues “to be ironed out”, in particular the price cap which has long been deemed unfair by those in expensive areas of the country.
Rachael Griffin, tax and financial planning expert at Quilter, said: “There are still some limitations. The house price cap of £450,000 has been unchanged since the LISA first launched in 2017 and 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.
“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… time will tell whether a more generous cap is brought to the table.”
Others have questioned the movement of when the bonus is paid, arguing the new framework prevents funds from “working for customers straight away”.
Brian Byrnes, director of personal finance at Moneybox, said: “Moving to a model where the bonus is only paid at the point of purchase would reduce that benefit and could leave first-time buyers needing to save for longer to reach the same deposit goal.
“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.”