HMRC has confirmed that the new ISA product being developed with the Government to replace the Lifetime ISA is intended to help first-time buyers only.
The ‘bonus’ given by the new ISA product will be given only when a saver buys a house, rather than on each payment made.
This will restrict the use of the new ISA beyond what is currently offered by the Lifetime ISA. Some Lifetime ISA savers are currently using the product to save for retirement.
Rachel Vahey, head of public policy at platform AJ Bell, is not surprised that the Government is looking to replace the Lifetime ISA with a cheaper model.
She said: “Paying an upfront bonus means having to claw it back if it’s not used in the intended way, and it’s this withdrawal charge that has caused a lot of the problems. It’s far easier to get rid of an upfront incentive and go back to giving a bonus only when a house is bought.
“The return to the help-to-buy model – the predecessor of the Lifetime ISA – should also be cheaper for the government. However, potential homeowners lose out on the investment growth earned on the bonus during the years they save for their first house. That might mean having less money to buy the home of their dreams.”
Currently, Lifetime ISAs can only be opened by UK taxpayers between the ages of 18 and 39. The Government tops up contributions up to £4,000 a year by 25%. Savers can either withdraw to buy their first home, or once they turn 60.
Consultation on the structure of the new house-purchase ISA will begin later this year.
Ms Vahey warned that the Government needs to consider how existing savers will transfer to the new product.
She said: “The government will soon consult on what the new house-buying ISA will look like. It needs to design the transition to the new product with the best interests of those who currently are investing in a Lifetime ISA in mind.
“It should be made easy for these people to continue to buy a house with their Lifetime ISA if they want, or to transfer their investment to the new ISA product without incurring an additional 6.25% charge on their savings.”