ASPIRING home owners could be left hundreds of pounds worse off after the Government announced a replacement for the Lifetime ISA.
The controversial Lifetime ISA (LISA), which has helped thousands of buyers get on the housing ladder for the first time, is being replaced by the First Time Buyer ISA in 2028.
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Like with the LISA, savers paying into the account will get a Government bonus to boost their cash pot.
But as details of the new product emerged yesterday, experts warned savers could be left more than £600 worse off.
That’s because the bonus for the First Time Buyer ISA will only be paid out when the saver is about to buy their first home.
Meanwhile, the LISA pays out a 25% government bonus every month.
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If savers are only paid the bonus at the end, rather than each month, they will be missing out on any interest they would’ve earned on the bonus.
For example, if you paid in £4,000 each year for five years into a First Time Buyer ISA then you would’ve put in a total of £20,000.
If you earned 4% interest on your savings each year, your cash would grow to £22,532.
Adding the 25% government bonus at the end would bring your total to £27,532.
But if you had a LISA and your bonus was paid monthly, your cash would grow to £28,165 in total.
That’s a big difference of £633.
Rachel Vahey, head of public policy at AJ Bell, said the move to a lump sum bonus has been done to avoid savers paying hefty withdrawal charges.
First-time buyers using the LISA face a withdrawal penalty if they use their money for anything other than their first home or retirement.
If you’re charged the withdrawal fee, you lose your government bonus and you’re also charged an effective penalty of 6.25% on the money you put in.
“Moving away from an upfront bonus should make the system simpler,” she said.
“Paying the bonus only when someone buys their first home removes the need to claw money back through a withdrawal charge if the savings are used in a different way.”
Brian Byrnes, director of personal finance at Moneybox, also warned the new product could end up less valuable for first-time buyers.
He said a monthly bonus creates a “powerful and visible reward” for saving but moving to a lump sum bonus “would reduce that benefit and could leave first-time buyers needing to save for longer to reach the same deposit goal”.
“We fully support the government’s continued focus on helping first-time buyers overcome the significant challenges of saving for a deposit,” he said.
“However, the more detail about the new product that emerges, the stronger the case becomes for improving the existing Lifetime ISA rather than replacing it with something demonstrably inferior.”
What you need to know about the First Time Buyer ISA
THE First Time Buyer ISA is set to launch in April 2028 and will be available for over-18s, with no upper age limit.
It’s not yet been announced how much the government bonus will be or how much you can save into the account each year.
But you’ll only be able to get the bonus once you’ve had the account open for over a year.
The government says it wants to bring in the First Time Buyer ISA because the LISA is “flawed”.
One of the biggest changes is to the withdrawal penalty.
Unlike the LISA, savers will pay no penalty if they withdraw their savings to use them on something other than their first home.
However, it appears the £450,000 house price cap is not yet being scrapped.
The government said it would launch a consultation on the price cap, but suggested keeping the cap would make sure the support “goes to people who need it most”.
However Rachael Griffin, tax and financial planning expert at Quilter, said the current cap “has become increasingly detached from reality in many parts of the country”.
“This has resulted in many people who have saved diligently, particularly those living in London and the South East, being unable to use their LISA for the property they need without facing a penalty,” she said.
Plus, the retirement aspect of the LISA will be scrapped.
The LISA can be used either for buying your first home or for retirement savings.
However the government wants to simplify this new product by keeping it just for first-time buyers.
If you’ve got a Lifetime ISA, don’t panic – your savings are still protected.
You’ll still be able to use your LISA to save towards your first home.
You will also be able to combine savings from a LISA and a First Time Buyer ISA to pay towards one house purchase.
However, you won’t be able to transfer your LISA savings to the new product.
