New ‘First Time Buyer’ ISA planned as LISA set to be scrapped – How will it work?

The government has announced plans to introduce a new First Time Buyer ISA (FTB ISA) to help aspiring homeowners get onto the property ladder. According to a newly published consultation document from HM Treasury, the proposed FTB ISA is designed to be a simpler alternative to the existing Lifetime ISA (LISA), which will eventually be phased out for new savers.

The Treasury has identified that the current LISA product is not working well for many consumers, with a growing number of savers losing a portion of their original savings due to strict withdrawal penalties. To address this, the new FTB ISA will remove the withdrawal charge entirely, providing much greater flexibility for savers whose financial circumstances change.

In this article we provide a breakdown of how the proposed First Time Buyer ISA will work, how it differs from existing schemes, and when it is likely to be introduced.

What is the First Time Buyer ISA?

The proposed First Time Buyer ISA is a new tax-free savings product specifically designed to help people save for their first home. It will be available as both a Cash and Stocks & Shares ISA, and any interest or investment growth will be tax-free.

Key features of the proposed FTB ISA include:

• No upper age limit - Unlike the LISA, which is only available to those aged between 18 and 39, the FTB ISA will be available to any UK resident aged 18 or over, with no upper age limit.
• No withdrawal penalties - Savers can withdraw their money at any time without penalty.
• Bonus paid at purchase - The government bonus will not be paid into the account on a monthly or annual basis. Instead, it will be calculated on the net subscriptions (deposits minus any withdrawals) and paid directly to the conveyancer when you purchase your first home.
• Mortgage requirement - The funds and the government bonus must be used alongside a legal mortgage to purchase a home up to a set property price cap. It cannot be used for cash-only purchases.
• One-year rule - The account must be open for at least 12 months before the government bonus can be claimed.

The exact annual subscription limits, the level of the government bonus, and the maximum property price cap have not yet been confirmed. The Treasury has stated that these figures will be announced at a future fiscal event, taking into account wider market conditions.

How does the FTB ISA compare to the Lifetime ISA?

While both accounts share the ultimate goal of helping you get onto the property ladder, the proposed FTB ISA strips away the complexity of the LISA in three crucial ways.

No penalties

The most significant difference between the two products is the removal of the 25% withdrawal charge. Under current LISA rules, withdrawing money for any reason other than buying a qualifying first home or reaching age 60 results in a penalty that eats into the saver's original capital. For example, if you save the maximum £4,000 in a LISA, the government adds a 25% bonus of £1,000, bringing your total pot to £5,000. If you later need to withdraw that money for an unexpected emergency, the 25% penalty is applied to the full £5,000, equating to a charge of £1,250. Therefore, you would only get £3,750 back, meaning you would lose £250 of your own savings.

Indeed, the Treasury's consultation highlights that more LISA holders have lost a part of their original savings to these charges than have actually used the account to purchase a house. The new FTB ISA removes this risk, allowing savers to access their own money without penalty if they face financial difficulties.

Bonuses

Another notable difference is that the FTB ISA bonus is calculated and applied only at the point of a property purchase. This means that taxpayer support is directed exclusively toward homeownership, rather than acting as an alternative pension.

No retirement savings

The Lifetime ISA was originally launched with a dual purpose: to help people save for a first home or for retirement. However, the Treasury Select Committee recently concluded that this dual-purpose design was flawed, as it increases the risk that consumers will choose unsuitable investment strategies.

Furthermore, the government believes the LISA may actually be diverting people away from saving into dedicated pension products that may be far more appropriate for their long-term retirement goals. To address this, the government is dropping the retirement element completely.

What happens to existing LISA and Help to Buy ISA holders?

If you already hold a Lifetime ISA, you will not be forced to close it. The government has confirmed that existing LISA holders will be able to continue saving into their accounts under the current rules indefinitely. However, you will not be able to transfer an existing LISA into a new FTB ISA. This rule is in place to prevent individuals from claiming multiple government bonuses on the same savings. That said, the Treasury has proposed that savers will be allowed to hold both a LISA and an FTB ISA, and can combine the funds from both accounts towards the same property purchase, provided they do not subscribe to both accounts in the same tax year.

For those who still hold a legacy Help to Buy ISA, the rules will differ slightly. Help to Buy ISA holders will be permitted to transfer their holdings into the new FTB ISA, up to the annual subscription limits.

When will the new ISA launch?

The First Time Buyer ISA is currently in the consultation phase. The Treasury is actively seeking views from the financial industry and the public on the design and implementation of the product. The consultation period runs until 17th August 2026, after which the government will finalise the rules and provide a timeline for when the new accounts will become available to the public.