The First Time Buyer ISA (FTB), a government-backed account aimed at supporting savers to buy their first home, will come under scrutiny today at a consultation.
Unlike its predecessor, the new version will not charge withdrawal fees to savers who withdraw money before purchasing their home.
Furthermore, the government bonus – which is paid annually under a Lifetime ISA – will be paid when the money is used to purchase a qualifying property.
In fact, one of the biggest complaints with LISAs was that many people lost money through “unauthorized” withdrawals, meaning that many did not benefit from the government bonus.
But while experts welcome this new feature, there are concerns that the proposals lack details around the contribution limit, maximum property price, and level of government bonuses.
Furthermore, the fact that the bonus is paid when savings have effectively been withdrawn has raised concerns because it reduces the investment growth potential that a regular bonus can provide.
Rachel Fahy, 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 on 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 turning 60.
“Moving away from the upfront bonus would make the system simpler. Paying the bonus only when someone buys their first home removes the need to get the money back through withdrawal fees if the savings are used in a different way.
“But this simplicity comes at a cost. Savers will lose out on the investment growth they would have earned on the bonus as they build their deposits. For some first-time buyers, this could mean having less money available when they come to buy a home.”
She explained that someone paying £4,000 a year into a LISA for five years with a bonus added each year would have built up £28,165, assuming 4% growth net of fees.
However, under an FTB ISA, assuming the same terms and a 25% government bonus, the ISA holder would collect just £27,532.
Another limitation of the new version is that existing LISA holders will not be able to transfer these funds into the new product. This will leave those with existing LISAs juggling two products, Fahey said.
What are the main features of the FTB ISA?
The current Lifetime ISA allows first-time buyers and those saving for their pension to save up to £4,000 a year tax-free and receive a 25% government bonus. It can be opened by anyone between the ages of 18 and 39.
Although there are no details about the upper saving limit for an FTB ISA, the under 40 age restriction has been lifted meaning it is open to all people aged 18 or over.
Savers can use cash or stock and share issues from the new FTB ISA. The annual cash FTB ISA limit will be reduced from £20,000 to £12,000 for under-65s in April 2027, so a cash FTB ISA will be included as part of this allowance.
How will the new ISA rules affect your FTB account?
At the moment, the government is keen to attract more people into saving in stocks and shares (ISAs) rather than cash – hence the change in allocations. As such, there are also some limitations in the FTB ISA proposals that point to this.
Nouran Mustafa, Practice Manager and IFA at Ruxton fortuneSpeaking to Newspage, he said: “My biggest concern is the proposed ban on transferring funds from an FTB ISA for stocks and shares into cash for close purchases.
“Buyers need to de-risk themselves as the trade date approaches, not gamble their deposits. Simpler is good. Simpler but rigid is not.”
But it was positive otherwise. She continued: “This is a much better trend than a Lifetime ISA. The LISA tried to be both a home deposit account and a retirement product, and then punished people for needing their own money when life got tough. That was always a strange design.”
“A first-time buyer with an ISA should do one thing well: help people build up deposits without trapping them. Paying the government bonus only when someone buys, while allowing them penalty-free access to their own savings beforehand, makes a lot more sense.”
“But the details are important. The maximum property prices, the maximum annual saving and the bonus rate are still unknown. If the cap remains too low, it will be useless in large parts of London and the south-east.”
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