First-time buyer Isa details emerge
Experts advise against waiting for the new first-time buyer Isa, as the existing lifetime Isa offers better financial benefits now.
Experts are urging aspiring homeowners not to delay saving for a deposit, despite government plans for a new first-time buyer Isa. More details have emerged about the account, which is not expected to launch until 2028 at the earliest and may offer less attractive terms than the current lifetime Isa.
Rachel Vahey, head of public policy at investment platform AJ Bell, says there is little reason to wait. "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," she stated.
Why the lifetime Isa is being replaced
The lifetime Isa offers a 25% government bonus on annual savings up to £4,000. This bonus is paid monthly. The account must be opened between ages 18 and 40, and savings can continue until 50. Funds can be used for a first home costing up to £450,000 or withdrawn after age 60.
However, the property price cap has remained at £450,000 since 2017. Withdrawing funds for a more expensive home triggers a 25% penalty. The government says evidence shows the account "is not working well for many." It will be replaced for new savers, but existing accounts can continue indefinitely.
The new first-time buyer Isa
The proposed first-time buyer Isa will be simpler. It will have no upper age limit and no withdrawal charges. Yet its financial benefits appear weaker. The government bonus will be paid as a lump sum when buying a home, not monthly. This means savers miss out on potential growth on that bonus.
Furthermore, the bonus will be based solely on contributions, not the final pot's value including interest or investment returns. Brian Byrnes, director of personal finance at Moneybox, provided a calculation. For a saver putting away £333 a month over 10 years at a 6% return, receiving the bonus at the end costs over £3,600 in lost growth. This assumes a 25% bonus, which is not yet confirmed for the new Isa.
Key details remain unknown. The annual contribution limit and whether the £450,000 property price cap will be increased are still unclear.
Rules for transferring accounts
Savers cannot transfer a lifetime Isa to the new first-time buyer Isa. This prevents claiming two lots of government bonus. It will be possible to hold both accounts, but only save into one type per tax year. Money from both can be used for the same home purchase.
Specific transfer rules will apply. Moving from a normal stocks and shares Isa into a cash first-time buyer Isa will be banned. Transfers from a normal cash Isa to a cash first-time buyer Isa, or from a stocks and shares Isa to a stocks and shares first-time buyer Isa, will be permitted. But choosing this route over a lifetime Isa means missing the current 25% government bonus in the interim. Savers should check our stats on savings growth to understand the long-term impact.
