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.
Why scrap the lifetime Isa?
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 It can then be used to help buy a first home, or withdrawn after age 60.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+
double quotation markFor 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 nowRachel Vahey, AJ Bell
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.
The outgoing lifetime Isa is still worth bagging, say experts. Photograph: Louisa Svensson/Alamy
Should I wait?
“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.
And the bonus will be based on what you have paid in (minus any withdrawals) rather than what your fund ends up being worth – it will not take into account any of the savings interest, or investment growth that you will have enjoyed.
“For a saver putting away £333 a month over 10 years at a return of 6%, receiving the bonus at the end, rather than monthly, costs them more than £3,600 in lost growth. That’s assuming a 25% government bonus,” says Brian Byrnes, the director of personal finance at the wealth management platform Moneybox.
However, we don’t yet know whether the new account will also offer a 25% government bonus, or if the annual contribution limit will also be £4,000.
We also don’t know if the £450,000 property price cap will be increased on either Isa.
Transferring from a normal stocks and shares Isa, into a cash first-time buyer Isa, will be banned. Photograph: Leonora Oates/Alamy
Can I move to the new Isa?
If you already have a lifetime Isa, or open one, you won’t be able to transfer it to the new Isa. This is to prevent account holders earning two lots of bonus government cash.
You will be able to take out a first-time buyer Isa as well, although you will only be able to save into one type in any single tax year.
Someone holding both accounts will be able to use the money saved in both towards the same home purchase.
Transferring from a normal stocks and shares Isa, into a cash first-time buyer Isa, will be banned. Transfers from a normal cash Isa into a cash first-time buyer Isa will be permitted, as would transfers from a stocks and shares Isa to a stocks and shares first-time buyer Isa. However, if you do this, as opposed to taking out a lifetime Isa, you will miss out on the 25% government bonus in the meantime.
