The Treasury has revealed more details about its plans to launch a new ISA product to help people saving for their first home.
The first time buyer ISA will replace the lifetime ISA, which allows people to save for a property or for their retirement and get a 25% government bonus on up to £4,000 a year of savings.
We knew the government was looking to launch the savings product, but now it has released a consultation which sets out the proposed rules for the account.
Government bonus
Unlike the Lifetime ISA, this account would only be available for first-time buyers who are purchasing a home with a mortgage.
Savers would still get a tax-free government bonus, but it will be added to the account at the point the holder is ready to buy their first home. At the moment, the bonus is added to a lifetime ISA monthly.
The bonus will be based on how much they have paid in, minus any withdrawals and not on any investment growth.
Withdrawal fees
Since it will be paid when the account is set to close, any withdrawal charges will be removed.
With LISAs, savers have to pay a 25% charge to withdraw any of their cash for any reason other than buying a home or retiring.
“Moving away from an upfront bonus should make the system simpler. 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,” said Rachel Vahey, head of public policy at AJ Bell.
“But this simplicity comes at a cost. Savers will lose out on the investment growth they could have earned on the bonus while building up their deposit. For some first-time buyers, that could mean having less money available when they come to purchase a home.”
Age limit and ISA rules
There will also be no upper age limit on the account, so people will never be too old to open or keep one.
The account will also sit within wider ISA rules, meaning any money paid in will count towards the overall ISA allowance.
Transfers and stocks and shares option
People will not be allowed to transfer cash between a LISA and a FTB ISA, but they will be able to use money from both accounts to put down a deposit on a home.
“This leaves Lifetime ISA holders potentially juggling two products ahead of their life-changing purchase,” said Vahey.
There will also be two types of FTB ISAs – a stocks and shares option and a cash option.
Transfers from a stocks and shares FTB ISA into a cash FTB ISA will not be allowed, whereas transfers the other way around will be.
People will also be able to transfer money from FTB ISAs into a normal stocks and shares ISA, but not into a normal cash ISA.
What don’t we know yet?
The government hasn’t set out some key details on how the account would work.
While it has said that there will be a bonus applied, we don’t know how generous it will be.
The consultation says: “An individual will subscribe to the FTB ISA up to the annual subscription limit, which will be eligible for a government bonus, but which will not be paid out immediately. As an individual continues to subscribe their eligible government bonus grows. Once ready to purchase their first property, the bonus will be made available to use towards their house deposit, alongside the funds they have subscribed.”
We also don’t know what that “annual limit” will be. For LISAs, it’s £4,000 a year.
Another missing detail is how much savers will be able to buy a property for using their FTB ISA funds.
LISA holders are able to buy a first home that costs up to £450,000 without paying any withdrawal charges.
What will happen to LISAs?
LISA holders will be allowed to save into the accounts in line with existing rules “indefinitely”, according to the consultation.
But the government has failed to set out how the self-employed could save for retirement once the option of taking out a Lifetime ISA has been removed for those who haven’t already opened one.
“The Treasury has been strikingly quiet on what this means for self-employed people saving for later life,” Vahey said.
“Those who already have a Lifetime ISA will be able to keep saving, but that does nothing for the thousands of self-employed workers and others without access to a workplace pension who may need a flexible retirement savings option in future.”
