Despite plans to scrap the lifetime Isa, experts still advise you open one now and not wait for the new first-time buyer account to launch
If you want to start saving towards your first home, don’t wait until a new Isa just for first-time buyers goes on sale. That is the advice from experts after more details emerged about a savings account the government plans to launch to help people get a foot on the property ladder.
The first-time buyer Isa is likely to replace the existing lifetime Isa in two years and is supposed to be simpler than the older account. However, it looks as if the financial benefits won’t be as attractive as those offered by the current product, so there’s no advantage in hanging around.
It offers a very good deal in the form of free cash, but it also has some downsides.
You must be 18 or over, and under 40, to open one, and you can pay in up to £4,000 a year until you turn 50. The money in the account can be saved in cash or invested. It can then be used to help buy a first home, or withdrawn after age 60.
The government adds a 25% bonus to your savings, paid monthly, up to a maximum of £1,000 a year. Someone who “maxes out” the account from age 18 to 50 could pocket £32,000 in free cash, which, in turn, will be increased by interest or investment returns, thus further boosting their savings pot.0+0+
But the property you buy must cost £450,000 or less – a cap that has stayed the same since 2017, while house prices have risen.
Savers who withdraw their money to spend on a property costing more than the price cap face a 25% charge for an “unauthorised withdrawal”. This is designed to recover the government bonus, but it also grabs some of the saver’s original investment.
Many experts say this would be easy to fix by simply increasing the price cap and reducing the penalty.
Instead, the government has decided to ditch the lifetime Isa for new savers, saying there is evidence it “is not working well for many”, and create a new account. It is thought this will not go on sale until 2028 at the earliest.
Until then, it will still be possible to open a lifetime Isa, and to carry on saving in line with the existing rules “indefinitely,” the Treasury says.
“For those starting to plan the next stage of their life and save towards a first home, there is little reason to delay if they are in a position to start saving now,” says Rachel Vahey, head of public policy at investment platform AJ Bell.
“Taking advantage of a lifetime Isa could allow them to benefit from the existing government bonus – and investment growth on it – while they wait for further details of the new product.”
There are other reasons why those in the industry are suggesting you don’t wait. The first-time buyer Isa appears to be more user-friendly than the lifetime Isa: it will have no upper age limit and no withdrawal charges.
However, savers could end up worse-off than those who use a lifetime Isa. With the new account, the government bonus will not be paid at the end of each month but as a lump sum at the point when the individual is buying their first home. So you will be missing out on any potential interest, or investment growth that the bonus might have attracted.
