First-time Buyer ISA vs Lifetime ISA: Which Should You Choose?
Experts recommend opening a Lifetime ISA now despite plans for a new First-time Buyer ISA, which may not offer as many benefits.
By The Guardian
The government is set to introduce a new First-time Buyer ISA, but financial experts advise individuals to open a Lifetime ISA immediately rather than wait for the new account to become available. The anticipated First-time Buyer ISA is expected to replace the Lifetime ISA by 2028 at the earliest, with the Treasury confirming that existing Lifetime ISAs will remain valid under current rules until then.
According to a report from The Guardian, the new account aims to simplify the savings process, but it may not provide the same financial advantages as the current Lifetime ISA. Notably, individuals who already possess a Lifetime ISA or choose to open one will not be able to transfer their funds into the new account.
Savers will have the option to maintain both types of accounts but can only contribute to one in a single tax year. Therefore, those looking to purchase their first home are encouraged to begin saving now rather than delay for the new account's launch.
The Lifetime ISA offers a government bonus of 25% on contributions, which can amount to a maximum of £1,000 per year. Individuals aged 18 to 39 can contribute up to £4,000 annually until they reach 50. This account can be used to assist in purchasing a first home or can be accessed after the age of 60. However, the property purchased must not exceed £450,000, a limit that has not changed since 2017 despite rising house prices.
Withdrawals for properties exceeding this cap incur a 25% penalty, which recoups the government bonus and reduces the saver’s original investment. Experts suggest that increasing the price cap and reducing penalties would improve the Lifetime ISA's appeal.
The government has indicated that the Lifetime ISA is being phased out due to its perceived ineffectiveness for many savers, with plans for the new account to be introduced by 2028. Until then, individuals can still open and contribute to a Lifetime ISA under existing regulations.
Rachel Vahey, head of public policy at investment platform AJ Bell, states, “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.” She emphasises the benefits of the existing government bonus and potential investment growth while waiting for more information about the new product.
The First-time Buyer ISA is expected to be more user-friendly, with no upper age limit and no withdrawal penalties. However, it may not provide the same level of financial growth as the Lifetime ISA. The government bonus for the new account will be paid as a lump sum upon purchasing a first home, rather than monthly, which could result in lost interest or investment growth.
Brian Byrnes, director of personal finance at Moneybox, highlights that receiving the bonus at the end rather than monthly could cost savers significantly in lost growth over time. The specifics of the new account, including whether it will offer a 25% government bonus and the contribution limit, remain unclear.
For those with an existing Lifetime ISA, transferring to the new First-time Buyer ISA will not be permitted to prevent individuals from receiving multiple government bonuses. However, savers can hold both accounts and use the funds from both towards the same home purchase. Transfers from a standard cash ISA to a cash First-time Buyer ISA will be allowed, but this could mean missing out on the government bonus during the transition.