Plans to replace the Lifetime ISA with a new savings product could leave aspiring homeowners worse off. Here’s what the proposed changes could mean.
First-time buyers could miss out on more than £3600 in potential interest if proposed changes to ISA rules go ahead, a savings provider has warned.
The government has been consulting on plans to replace the existing Lifetime ISA, commonly known as a LISA, with a new First Time Buyer ISA.
Under the current Lifetime ISA scheme, savers can deposit up to £4000 each tax year and receive a 25% government bonus, worth up to £1000 annually. This bonus is added as people save, allowing it to earn interest or benefit from investment growth alongside their own money.
However, the proposed replacement would provide a single government bonus when the saver is ready to purchase their first home. The option to use the account to save for retirement would also be removed.
How could first-time buyers be affected?
Savings platform Moneybox believes delaying the bonus until a property is purchased would reduce the amount first-time buyers can build towards their deposit.
Its analysis suggests that a typical person saving for ten years could miss out on approximately £3606 in compound growth. This is the additional return that can be generated when interest or investment gains accumulate over time.
There are also concerns about proposals that could prevent savers from transferring money from a stocks and shares account into cash as they approach their property purchase. This could leave their deposit exposed to stock market movements at a time when they may need greater certainty.
High rental costs
The findings come as many aspiring homeowners are already struggling to save. A survey commissioned by Moneybox found that 71% of first-time buyers expect buying a home to take a long time due to high rental costs and cost-of-living pressures. Mortgage Solutions reports that one in five are delaying starting a family, while 19% are postponing retirement saving.
Calls to improve the existing Lifetime ISA
Rather than introducing another product, Moneybox is calling on the government to improve the existing Lifetime ISA.
Its recommendations include reviewing the current £450,000 property price limit every year, so it reflects changes in house prices. It also wants the withdrawal penalty reduced from 25% to 20%. This would help to ensure savers do not lose any of the money they personally contributed if their plans change.
Changes not confirmed yet
It’s important to stress that these are just proposals, and the final details of any replacement ISA have not yet been decided. The consultation proposes allowing existing LISAs to remain open indefinitely under the current rules, even if they close to new applicants. This means an eligible saver could open a LISA now with as little as £1, start the 12-month period before it can be used towards a first-home purchase, and later contribute up to £4000 a year while receiving the 25% government bonus until age 50. Opening one with a nominal sum could be worth considering. However, the proposals are not yet final, and the rules could still change. We will keep you updated.