The government has drawn up plans for its new First Time Buyer Isa to replace the Lifetime Isa.
This concerns advice on the new product, which will be exclusively for starters and not for the dual purpose of pension savings as the Lifetime Isa was.
The Lifetime Isa has attracted criticism, both for its withdrawal penalties and the maximum price limit for first-time home buyers, both of which have limited its uptake.
The government’s consultation shows that the new product will be intended for starters of all ages from 18 years old.
Instead of charging penalties for early withdrawals, the scheme will pay savers a bonus on exchange contracts when the money is used to buy a first home.
Savers can contribute up to an as yet unspecified annual limit, which will count towards their total ISA benefit.
The savings can be used to buy property in Britain up to a certain value, yet to be determined, provided it is bought with a mortgage.
Cash-only home purchases are not eligible.
Both the Cash and Stocks & Shares versions will be available. The government bonus will be based on net contributions, after any withdrawals, and not on the final account value.
Quilter tax and financial planning expert Rachael Griffin says: “The proposed replacement of the much-criticized Lifetime ISA marks a clear step towards creating a savings product that better reflects the realities facing aspiring homeowners, but there are still issues to be resolved.
“Importantly, the consultation suggests a shift whereby the government bonus is paid out when the money is used to purchase a property, rather than up front.
“Doing this will remove the need for what is currently a very high withdrawal fee, clawing back not only the government bonus but also people’s hard-earned savings.
“Thousands of savers have been charged to access their LISA for an unauthorized withdrawal, often because their financial circumstances changed unexpectedly and they had to dip into their savings.
“Giving people access to their money when they need it, while still encouraging them to save for a down payment on a first home, would be a much better design.
“Just as important is the decision to abolish the age limit.
“The average age of a first-time buyer has continued to rise, but the Lifetime ISA effectively closed the door to those who didn’t get on the property ladder before turning 40.
“A reformed product without an age limit would reflect a more modern housing market.”
But Griffin warns that the uncertainty over where the property price cap will be set risks undermining the product.
She says the LISA’s £450,000 limit has remained unchanged since its launch in 2017 and has become increasingly disconnected from reality in many parts of the country.
Griffin says: “This has meant that many people who have been diligently saving, especially those living in London and the South East, are unable to use their LISA for the property they need without incurring a penalty.
“This has undermined confidence in the product and increased complexity. Unfortunately, this does not appear to have been addressed within the new product yet, going so far as to suggest that the existing limit is appropriate.
“The Ministry of Finance is discussing the limit, in addition to considerations on the annual subscription limit, so time will tell whether a more generous limit will be put on the table.”
Griffin points out further complexities that could pose problems for some savers.
She says: “Existing LISAs cannot be transferred to the new FTB ISA, but a Help to Buy ISA can.
“You can have one of each and both can be used to buy the same house, but subscriptions can only be paid for in one.
“This, combined with the property price cap on LISAs, means that those who have been diligently saving in a LISA but overpriced will still receive a penalty if they use their LISA to buy their first home.”