The First Time Buyer (FTB) ISA, a government-backed account aimed at helping savers buy their first home, will be scrutinized in a consultation today.
Unlike its predecessor, the new version does not charge withdrawal fees for savers who withdraw the money before purchasing their home.
In addition, the government bonus – which is paid out annually under the Lifetime ISA (LISA) – would be paid out when the money was used for a qualifying property purchase.
One of the biggest complaints with the LISA was that many people lost money through ‘unauthorized’ withdrawals, meaning many did not benefit from the government bonus.
But while experts welcome the new feature, there are concerns that the proposals do not include details on the contribution limit, the property price limit and the size of the government bonus.
Furthermore, the fact that the bonus is paid out when the savings are actually withdrawn has raised concerns as it reduces the investment growth potential that a regular bonus could provide.
Rachel Vahey, head of public policy at AJ Bell, said: “Since its launch in 2017, the Lifetime ISA has helped thousands of young people take their first step onto the property ladder. But the product has never been perfect and withdrawal fees have caused real problems for savers who need to access their money for any reason other than buying a qualifying first home or reaching the age of 60.
“Moving away from an upfront bonus should make the system simpler. By only paying the bonus when someone buys their first home, it will eliminate the need to claw back money through withdrawal fees if the savings are used in another way.
“But this simplicity comes at a cost. Savers will miss out on the investment growth that they could have earned with the bonus while they had built up their deposit. For some first-time buyers, this could mean that they have less money available when they buy a house.”
She explained that someone who had paid £4,000 a year into the LISA for five years, with a bonus each year, would have accrued £28,165, assuming 4% growth after fees.
However, under the FTB ISA, assuming the same terms and a 25% government bonus, the ISA holder would have accrued only £27,532.
Another limitation of the new version is that current LISA holders cannot transfer this money to the new product. Vahey said this leaves those with existing LISAs having to juggle two products.
What are the main features of the FTB ISA?
The existing Lifetime ISA allows first-time buyers and those saving for retirement to save up to £4,000 a year tax-free and receive a 25% government bonus. It can be opened by anyone from 18 to 39 years old.
While there are no details on the FTB ISA’s upper savings limit, the under-40 age restriction has been lifted, meaning it is open to anyone aged 18 or over.
Savers can use both cash and share versions of the new FTB ISA. The annual cash ISA limit will be reduced from £20,000 to £12,000 for under-65s in April 2027 and therefore a cash FTB ISA would be included as part of this allowance.
How do the new ISA rules affect the FTB account?
Currently, the government is keen to encourage more people to save in shares and ISAs rather than cash – hence the change to the allowance. As such, there are also some limitations in the FTB ISA proposals that point to this.
Nouran Moustafa, practice director and IFA at Roxton wealthSpeaking to the Newspage Agency said: “My biggest concern is the proposed ban on converting money from a shares FTB ISA into cash close to purchase.
“Buyers should reduce risk when the stock market approaches, and not gamble with their deposit. Simpler is good. Simpler but rigid is not.”
But otherwise she was positive. “This is a much better direction than the Lifetime ISA,” she continued. “The LISA tried to be a home deposit account and a pension product at the same time, and then punished people for needing their own money when life went wrong. That was always a strange design.
“A first-time buyer ISA should do one thing well: help people make a deposit without trapping them. Paying the government bonus only when someone buys, while giving you penalty-free access to your own savings upfront, makes much more sense.
“But the details matter. The property price cap, annual savings limit and bonus rate are still unknown. If the cap remains too low it will be useless in large parts of London and the South East.”