The next few months could be a difficult time for first-time buyers. If you or your loved ones are looking to enter the housing market during 2024, you might have considered a Lifetime ISA (LISA).
The tax-efficient LISA is a savings and investment product that comes with the draw of a 25% government bonus, but strict rules can lead to high charges. There’s also the issue of an upper limit on house prices that could be especially prohibitive for those hoping to buy in or around London.
Keep reading for a closer look at the LISA, and why future changes might be necessary to ensure they remain a good option for would-be homebuyers.
More than half a million LISAs have been opened in the last 5 years
LISAs can be opened by UK residents aged 18 to 40 and you must make your first contribution before you turn 40. They can be used to save up to £4,000 a year toward a first home, with a 25% bonus added to your savings by the government, up to a maximum of £1,000 per year. The money you put into a LISA counts towards your annual ISA allowance (£20,000 for 2024/25). Your money can be either saved or invested, depending on the type of LISA chosen:
Cash LISA – Like a traditional savings account, you receive interest on your savings.
Stocks and Shares LISA – Your money is invested in the stock market with returns dependent on performance.
Just as with other types of ISAs, LISAs are highly tax-efficient. There is no income tax to pay on savings interest, nor any Capital Gains Tax (CGT) on investment returns generated.
You or your loved one can continue to contribute to the LISA until age 50. From this point, the account remains open and will continue to earn tax-efficient interest or investment returns, but you will not be able to pay more into it or earn the 25% bonus.
You must use your LISA to help buy your first home or for retirement, and restrictions apply. If you withdraw the money before turning 60 for a reason other than purchasing a home, you’ll pay a withdrawal charge of 25%.
More than 500,000 LISAs have been opened since they were introduced in 2017. But, more than five years later, LISA rules might need revisiting if they are to remain popular among those looking to take their first steps onto the property ladder.
Beware potential charges and be sure the money will be used towards a first home
A LISA is designed to provide help toward the cost of a first home or for retirement. If you or a loved one withdraw funds for any reason other than buying a home before the age of 60, you’ll pay a withdrawal charge of 25%.
The government look to recoup their 25% bonus through the 25% charge. However, the charge is payable on the whole fund value, so this means the government will take back more than they put in.
Say you have a Cash LISA fund of £12,500, made up as follows:
Your contribution – £10,000
25% bonus – £2,500
The exit charge is then calculated on the full amount:
25% charge – £3,125
You receive – £9,375
You will have lost £625 through not using your LISA as the government intended. If this charge affects you or a loved one, you won’t be alone.
MoneySavingExpert recently confirmed that savers have lost more than £126 million since the LISA was launched. Of this, around £108 million came from recouped government bonuses, while £18.5 million was savers’ own cash.
In 2022/23, LISA savers were fined more than £9 million. This has led to calls for a change in the rules.
House prices are rising and the upper limit is especially prohibitive in London
There are several reasons why, other than a house purchase, savers might opt to withdraw their money. The cost of living crisis has affected millions of UK households and might have meant some families needed the money urgently.
But there are other stipulations too. If you withdraw money within the first year of opening the LISA, even if the money is used to buy a first home, the charge applies.
You’ll also pay the charge if your first home is valued at more than £450,000. This limit has remained the same since the LISA was introduced. During the same periods, house prices have risen by 33%.
This issue can be more or less of a problem depending on the type of first home you are looking to buy, whether you are buying on your own or as a couple, and where in the country you are looking to buy.
According to MoneySavingExpert, in the 12 months to April 2023, the average cost of a first-time-buyer property in London exceeded £450,000. Outside of London, meanwhile, property prices in some parts of the UK – the East Midlands, the north west of England, Yorkshire and Wales, for example – have increased by around 60%.
Rising house prices, and the value of charges taken, have led some in the sector to call for legislative change. FTAdviser reports that saving and investment app, Moneybox, has called for the price limit to rise in line with house price rises. Is this a change we might see in the future?
Despite all this, the LISA remains attractive for first-time buyers. While changes to future-proof the LISA are needed, the product still remains a tax-efficient way to save for retirement and help first-time buyers onto the property ladder.
This article is for information purposes only and does not constitute advice or a personalised recommendation.
The value of investments can go down as well as up and you may not get back the full amount invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
By incurring a Lifetime ISA government withdrawal charge, you may get back less than you paid in. Saving in a Lifetime ISA may affect your entitlement to current and future means-tested benefits.
Information correct as at 26/04/2024.
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