Should you still open a Lifetime Isa to save for a first home, even though new Government backed account is on the way?

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There was good news for prospective first-time buyers in Chancellor John Healey's recent Budget, as a new Isa was announced to help people get on the property ladder. 

The First Time Buyer Isa will be similar to the existing Lifetime Isa (Lisa) in that it will provide savers with a government bonus on their cash. 

And in a major boost for buyers, it won't charge a penalty to those who withdraw their cash and don't use it to buy a home.

The bad news is that this new Isa won't launch until April 2029.

According to Laura Suter, director of personal finance at investment platform AJ Bell, this means that the Lifetime Isa remains the 'only option' for those who want to save today and bag a Government bonus.

'The Lifetime Isa will remain open for new customers until April 2029 and even after that existing customers can carry on paying in,' she said.

Government boost: The Lifetime Isa can help you save for a first home quicker

The Government has made Lifetime Isas less risky for account holders by tweaking the withdrawal penalty.

The maximum property purchase price when using a Lifetime Isa is still £450,000. But if you eventually end up buying a more expensive home, you can withdraw the funds and pay just a 20 per cent penalty.

This means you get back what you put in, minus the Government bonus. A 25 per cent penalty previously applied.

What will the First Time Buyer Isa look like?

At first glance the account appears similar to the Lifetime Isa.

First time buyers will benefit from a 25 per cent Government bonus on their contributions in the First Time Buyer Isa, with the maximum amount you can pay in yearly set at £4,000.

And just like the Lifetime Isa, the purchase price of the first home must be £450,000 or less – with the Government resisting calls to raise the cap.

One big difference is that the Government will only pay the bonus when withdrawing the money for a house purchase, which means there are no penalties on withdrawals – you simply don't receive the bonus. 

The First Time Buyer Isa could therefore be better if you're worried about your plans changing.

The new product is also dedicated to saving for a first home, whereas the Lifetime Isa is also intended as an extra vehicle for saving for retirement.

People aged under 40 can open one and save into the Lifetime Isa until they're 50, with access to the account being possible at 60.

This means that the Lifetime Isa still has value for groups that can't rely on pension auto-enrolment and generous employer contributions, such as the self-employed.

The Lifetime Isa closes for new entrants from April 2029.

FIRST TIME BUYER ISA VS LIFETIME ISA 

	First Time Buyer Isa	Lifetime Isa
Maximum annual contributions	£4,000	£4,000
Government top-up	25%	25%
Top-up paid	On final balance at property purchase	On contritbution
Maximum possible bonus	£20,000	£32,000
Access	Penalty-free withdrawals	On property purchase or at 60, otherwise 25% penalty applies (20% if withdrawing for home worth more than £450,000)
Maximum property purchase price	£450,000	£450,000
Eligibility	Must be 18 or over; no upper age limit	Must be 18 to 40; no subscriptions allowed over 50
Source: Gov.uk

How will the First Time Buyer Isa interact with the Lifetime Isa?

The good news is that you can use the bonus from both accounts towards the purchase of your first home, so there's no harm in opening and continuing to use a Lifetime Isa.

'However, you can’t transfer your existing Lifetime Isa savings across to the First Time Buyer Isa – so you may need to run both products together,' said Laura Suter from AJ Bell.

'You can only pay into one product each tax year – but you can use the money from both towards your deposit,' she added.

The Lifetime Isa's predecessor was a product called the Help to Buy Isa, which closed to new applicants in 2019. 

But those who already have the account can carry on paying into it until November 30, 2029, with the scheme closing completely on December 1, 2030.

If you have one, you'll be able to transfer a Help to Buy Isa to the First Time Buyer Isa, provided you meet the deadlines mentioned above.

Why wait until the First Time Buyer Isa launches?

According to Suter, one group will have to wait until April 2029 if they want to secure a Government bonus to help purchase their first property.

This is people over the age of 40, because you can only open a Lifetime Isa if you're 39 and under.

There's no upper age limit for opening the First Time Buyer Isa.

The Lifetime Isa also closes for new contributions when you hit 50, locking out older first-time homeowners from receiving more Government top-ups.

Which Lifetime Isa should you open?

If you're keen to open a Lifetime Isa, you can read our guide to the best Lifetime Isas for help choosing one.

We run through whether a cash or stocks and shares Lifetime Isa is good for your situation, alongside giving our pick of the best accounts currently available from the likes of AJ Bell Dodl, Moneybox and Plum.

Moneybox offers a cash Lifetime Isa at a rate of 4.75 per cent variable, which includes a fixed 1.95 per cent bonus for 12 months. 

Meanwhile Plum's cash Lifetime Isa* has a rate of just 4.2 per cent variable, and this also includes a fixed 12-month boost, of 1.09 per cent. This means however that Plum's underlying rate is stronger than Moneybox's at 3.11 per cent.

If you're looking for a stocks and shares Lifetime Isa, AJ Bell Dodl has a good account for novice investors, and also offers a rate of 3.8 per cent variable on uninvested cash.

Investment platforms including AJ Bell* and Hargreaves Lansdown* also offer stocks and shares Lifetime Isas.

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