The government has set out plans for its new First Time Buyer Isa to replace the Lifetime Isa.

It is consulting on the new product, which will be solely for first-time buyers and not for the dual purpose of retirement saving as the Lifetime Isa was.

The Lifetime Isa has drawn criticism, both for the withdrawal penalties and the maximum price limit for first-time buyers purchasing a home, both of which have limited its take up.

The government’s consultation says the new product will be aimed first-time buyers of all ages from 18 onwards.

Rather than charging penalties for early withdrawals, the scheme will pay savers a bonus on exchange of contracts when the funds are used to buy a first home.

Savers will be able to contribute up to an as-yet-unspecified annual limit, which will count towards their overall ISA allowance.

The savings can be used to buy any UK property up to a certain value, which has yet to be determined, provided it is purchased with a mortgage.

Cash-only home purchases will not be eligible.

Both Cash and Stocks & Shares versions will be available. The government bonus will be based on net contributions, after any withdrawals, rather than the final account value.

Quilter tax and financial planning expert Rachael Griffin says “The proposed replacement for the much-criticised Lifetime ISA marks a clear step towards creating a savings product that better reflects the realities facing aspiring homeowners, but there are issues still to be ironed out.

“Importantly, the consultation suggests a shift that would see the government bonus paid when the funds are used to purchase a property, rather than up front.

“In doing so, it removes the need for what is currently a highly-punitive withdrawal charge that sees not only the government bonus clawed back, but some of people’s hard-earned savings too.

“Thousands of savers have been charged for accessing their LISA for an unauthorised withdrawal, often because their financial circumstances changed unexpectedly and they needed to dip into their savings.

“Allowing people to access their money when needed, while still being incentivised to save towards a deposit for a first home, would be a much better design.

“Equally important is the decision to remove the upper age limit.

“The average age of a first time buyer has been consistently on the rise, yet the Lifetime ISA effectively shut the door on those who did not get onto the property ladder prior to turning 40.

“A reformed product with no age limit would reflect a more modern housing market.”

But Griffin warns uncertainty over where the property price cap will be set risks undermining the product.

She says the LISA’s cap of £450,000 has been unchanged since its launch in 2017 and has become increasingly detached from reality in many parts of the country.

Griffin says: “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.

“This has undermined confidence in the product and added complexity. 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.

“The Treasury is consulting on the cap, alongside considerations on the annual subscription limit, so time will tell whether a more generous cap is brought to the table.”

Griffin highlights further complexities that could pose some savers difficulties.

She says: “Existing LISAs cannot be transferred to the new FTB ISA, but a Help to Buy ISA can be.

“You may hold one of each and both can be used to purchase the same home, but subscriptions can only be paid into one.

“This, combined with the property price cap on LISAs, means those that have saved diligently into a LISA but have been priced out will still receive a penalty if they use their LISA to purchase their first home.”