The Treasury has published a consultation on the launch of a new ISA product to support first-time buyers, but industry commentators have questioned the new framework.
The ‘First Time Buyer’ ISA (FTB ISA) is set to replace the Lifetime ISA (LISA), which has come under scrutiny for the complexity of its dual purpose and withdrawal charge. Under LISA rules, anyone making an unauthorised withdrawal is subject to a 25% penalty charge.
In its consultation paper, the Treasury conceded that the LISA is “not working well for many” and said the number of unauthorised withdrawal charges is increasing year-on-year, reaching 8% of all accounts opened in 2024-25.
In contrast, the new FTB ISA is designed to be a simpler product, created solely for the purposes of buying a first home. It will include a government bonus paid at the point an individual makes a withdrawal for purchasing their first home, removing the need for a withdrawal charge and means a saver can withdraw funds should their circumstances change, without penalty.
People saving for their first home through the product will be able to save up to a certain limit a year, which will count towards their ISA allowance. It can be put towards any home in the UK valued up to a set price cap.
It will be available for those aged 18 and over and unlike the LISA, there will be no upper age limit in recognition of the fact that the age at which a first home is bought is rising.
However, AJ Bell head of public policy Rachel Vahey criticised the Government’s failure to confirm what the subscription limit, property price cap and level of government bonus will be.
Vahey said: “Today’s consultation gives us the broad shape of the new ‘First Time Buyer ISA,’ but leaves us guessing on some of the most important aspects. Without detail on the level of government bonus, subscription limits or property price cap, it is difficult to judge whether this new product will be a meaningful improvement for aspiring homeowners.
“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.
“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.”
Vahey also notes the Treasury’s failure to explore consequences for the self-employed, who have used the LISA to save for retirement.
“The Treasury has been strikingly quiet on what this means for self-employed people saving for later life. 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,” she explained.
Rebecca Williams, financial planning divisional lead at Rathbones, commented: “A new First Time Buyer ISA could mark a welcome shift towards simplicity in a space that has often felt unnecessarily complicated.
“A more focused product that is solely geared towards getting on the housing ladder should be easier to understand and use in practice, particularly as it removes the withdrawal penalty that proved so contentious with the LISA.
“However, this comes at the expense of the Lifetime ISA, which did offer under‑40s another tax‑efficient route to build savings for later life. One of its key advantages was that withdrawals from age 60 are completely tax free – a notable contrast to pensions, where typically only 25% can be taken tax-free. Yet from our experience, the product often flew under the radar and was poorly understood by many savers.”
Williams also pointed out that the new product does not change the fundamental challenge facing first-time buyers.
“Younger generations are contending with a double squeeze of high rents and elevated living costs, making it increasingly difficult to build a deposit. As a result, the traditional milestone of homeownership is drifting into the mid‑thirties for many.
“That in turn is placing growing strain on the Bank of Mum and Dad, with many parents stepping in to help their children onto the ladder, often at the expense of their own financial plans,” she added.
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