The Chancellor must make immediate changes to a government savings scheme after house price increases over the past six years have led to aspiring first-time buyers being “fined” for withdrawing their cash, MoneySavingExpert.com founder Martin Lewis has warned.
Lifetime Isas (Lisas) were launched in 2017 and are designed to help people aged 18 to 39 buy their first home or, much less popularly, to save for retirement. Savers get a 25 per cent government boost when they use the funds to buy a home, but they are not allowed to use them to buy property over £450,000.
If they do not use the money to buy a home under this amount, but withdraw it before retirement, they are hit with a penalty.
The £450,000 threshold has not increased since 2017, even though house prices have risen by 33 per cent since then, according to Money Saving Expert, leaving more savers facing financial loss when they take out their cash.
In some areas of the UK, it is now very difficult to find properties under £450,000. In 2017, there were 331 postcode regions where at least 40 per cent of homes sold for more than £450,000, but last year there were 569 areas.
Mr Lewis said he has contacted the Chancellor Jeremy Hunt “to urge him to make the system fairer.”
The way the withdrawal penalty works means it is levied after you receive your bonus, so if you save £1,000 and get a £250 bonus, you’ll have £1,250 total, but will be hit with a penalty of £312.50 on withdrawal.
This means a saver who initially deposited £1,000 would get £937.50 back. In effect, this means that withdrawing for reasons other than buying your first home or retirement loses you 6.25 per cent of what you contributed.
Mr Lewis says the scheme is currently a “dead duck” and that a “simple solution”, would be for Lisa holders purchasing a first-time property for more than the maximum house price not to be fined, so they lose the 25 per cent bonus, but they get their own money and interest back.
“The fine was originally put in place to stop people using Lisas for purposes other than what they were intended for. House-buyers aren’t doing that, so they shouldn’t be penalised; they should at least get back what they put in,” said Mr Lewis.
“Many who have opened Lisas with government encouragement now have not only a dead duck product – where they won’t get the promised 25 per cent boost – but one with a poisoned beak, because they’re fined to get their money out.”
He added: “A longer-term idea would be to link and backdate the Lisa maximum to national or, better still, regional house price changes. So, those who open them have a legitimate expectation they will be able to use them to buy the type of house they’re considering.”
Mr Lewis’s intervention comes as the Government is reportedly mulling over possible housing market stimulus for this month’s Autumn Statement.
But economists have warned that any boost to the market could risk increasing inflation.
A Treasury spokesperson said: “The Lifetime Isa helped over 50,000 people get on the property ladder last year and while the average price of a first time home has increased, it remains below the cap across the vast majority of the country.
“As ever, we keep all aspects of the savings rules, including the Lisa, under review.”
