Chancellor Rachel Reeves is set to introduce a new cash withdrawal rule for all over-18s as part of plans to replace the Lifetime ISA (LISA) with a new product aimed solely at first-time buyers. The move follows revelations that households have faced staggering penalties of up to £10,600 for unauthorized withdrawals.
Government Consultation on New ISA
In a consultation published on Tuesday, the Labour government confirmed the new product, dubbed the ‘First Time Buyer ISA’ (FTB ISA), will only be available to those over 18 who are looking to purchase their first home. The government acknowledged that the Lifetime ISA was “not working well for many,” primarily due to withdrawal penalties, which it plans to scrap.
Current Penalty System
Under the current LISA system, if funds are removed for an unauthorized purchase or for properties exceeding the cap, holders face a 25% penalty on the withdrawal. The Treasury admitted that this charge was “putting off some savers” and preventing many from accessing the support they are entitled to. The Treasury stated: “We recognise the Lifetime ISA is not working for everyone.”
Impact on Savers
Freedom of Information Act figures reveal that some savers have lost more than £10,000 after making withdrawals, with some facing charges as high as £10,600. The update comes amid speculation that Reeves will be replaced in a potential Andy Burnham government, with Ed Miliband reportedly his pick for Chancellor if he takes over from Sir Keir Starmer as Prime Minister.
Expert Reactions
Rachael Griffin, tax and financial planning expert at Quilter, noted limitations in the new proposal: “The house price cap of £450,000 has been unchanged since the LISA first launched in 2017 and has become increasingly detached from reality in many parts of the country. This has resulted in many people who have saved diligently, particularly those living in London and the South East, being unable to use their LISA for the property they need without facing a penalty. Unfortunately, this does not appear to have been addressed within the new product as yet, and even goes as far as suggesting that the existing cap is suitable… time will tell whether a more generous cap is brought to the table.”
Concerns Over New Product
Brian Byrnes, director of personal finance at Moneybox, expressed concerns: “Moving to a model where the bonus is only paid at the point of purchase would reduce that benefit and could leave first-time buyers needing to save for longer to reach the same deposit goal. The current proposal is more complicated, more restrictive and potentially less valuable than the options many savers already have available. We fully support the government’s continued focus on helping first-time buyers overcome the significant challenges of saving for a deposit. However, the more detail about the new product that emerges, the stronger the case becomes for improving the existing Lifetime ISA rather than replacing it with something demonstrably inferior.”
