UK looking at scrapping Lifetime ISA in favour of First Time Buyer ISA
Key Points
- The Treasury is consulting on replacing the Lifetime ISA with a new First Time Buyer ISA for aspiring homeowners.
- The government bonus would be paid at the point of property purchase rather than up front, removing the need for a withdrawal penalty.
- The proposed First Time Buyer ISA would scrap the Lifetime ISA's upper age limit of 40.
- The £450,000 house price cap, unchanged since 2017, would remain in place, though the Treasury is consulting on it.
- Existing Lifetime ISAs could not be transferred to the new First Time Buyer ISA, but Help to Buy ISAs could.
The Treasury has launched a consultation on replacing the Lifetime ISA (LISA) with a new First Time Buyer (FTB) ISA, in a move that could end the product’s contentious withdrawal penalty and remove its upper age limit.
The consultation sets out proposals for a savings product aimed more squarely at aspiring homeowners, addressing several of the criticisms that have dogged the Lifetime ISA since its launch in 2017.
Under the most significant proposed change, the government bonus would be paid when funds are used to purchase a property, rather than up front.
This would remove the need for the current withdrawal charge, which sees the government bonus clawed back alongside a portion of a saver’s own contributions when money is accessed for an unauthorised purpose.
Thousands of savers have been hit with the charge for accessing their Lifetime ISA early, often after their financial circumstances changed unexpectedly and they needed to draw on their savings.
The consultation also proposes removing the upper age limit. The Lifetime ISA can only be opened by those under 40, effectively shutting out older savers at a time when the average age of a first-time buyer has been rising.
However, the proposals leave the £450,000 house price cap unchanged. The cap has remained the same since the Lifetime ISA launched in 2017, and has increasingly placed properties in London and the South East beyond reach for diligent savers without incurring a penalty.
The Treasury is consulting on the cap alongside the annual subscription limit, but the consultation suggests the existing threshold remains suitable.
Existing Lifetime ISAs will not be transferable to the new First Time Buyer ISA, though Help to Buy ISAs will be. Savers may hold one of each and use both to purchase the same home, but subscriptions can only be paid into one account.
Rachael Griffin, Tax and Financial Planning Expert at Quilter, said the proposed replacement marked a clear step towards a product that better reflects the realities facing aspiring homeowners, but warned that issues remained to be ironed out.
She noted that paying the bonus at the point of purchase, rather than up front, would remove the need for a highly punitive withdrawal charge and allow people to access their money when needed while still being incentivised to save towards a deposit.
She added that the removal of the age limit as equally important, arguing that a product with no age cap would better reflect a modern housing market.
Griffin said the unchanged £450,000 cap remained a limitation, noting it had become increasingly detached from reality in many parts of the country and had undermined confidence in the product.
She warned that savers who had paid diligently into a Lifetime ISA but had been priced out would still face a penalty if they used it to buy their first home.
She added that the original Lifetime ISA had attempted to serve two distinct goals, saving for retirement and saving for a first home, but had failed to meet either effectively.
It was vital, she said, that the final design of the First Time Buyer ISA avoided recreating the same barriers and confusion that had undermined confidence in its predecessor.
The Treasury is now consulting on the proposals, including the house price cap and annual subscription limit.
