The Lifetime ISA helped 413,000 people buy homes. Is scrapping it an overreaction?

The Lifetime ISA (LISA) has helped over 413,000 people get onto the property ladder since it launched in 2017, but the government are now looking to replace it with a new product. The LISA helps people to save for their first home or retirement offering a 25 per cent bonus on savings. But the product has started to come under criticism in recent years – for two main reasons. LISA holders face a 25 per cent penalty if they are using the money for anything other than retirement, or to buy a first property worth under £450,000. As this applies to the entire withdrawal amount – your savings plus the government bonus – it results in you losing the entire bonus plus 6.25 per cent of your own original personal savings. For example, if you saved £1,000 and got a £250 bonus, you would have £1,250 total. If you then withdrew it and closed the account, the 25 per cent penalty would be £312.50. So you would get £937.50 back. This, coupled with the fact that the £450,000 limit has never risen in line with house price growth, means hundreds of thousands of people who diligently saved for a home – 154,100 last year – have effectively been charged for accessing their own money. Shorts Now, after a consultation looking into how the product works in practice, the government has announced plans to introduce the First-Time Buyer ISA in around two years’ time, after finding the LISA is not working well for many. The new product would be for first-time buyers only – you won’t be able to use it to save for retirement – and would see savers receive a government bonus on their savings after completion of their house purchase. The exact purchase price limit is yet to be determined, but paying the bonus after completion means buyers won’t be hit with a penalty in the way they are now. But is a complete overhaul needed, or will it just create more confusion in what is already a complex ISA landscape? The numbers that show the success of the LISA – and its limits The LISA was never adopted by many major high-street banks, with newer app-based platforms and building societies taking up much of the mantle. In fact, one savings and investment platform – Moneybox – launched just a decade ago, now accounts for more than half of all of the house purchases ever made with LISAs, at around 243,000. Its figures show how important it has been in some areas of the country. Some bigger cities outside London have seen thousands use the product, with 3,685 people using Moneybox’s product across Bristol East, Northeast and South. The £450,000 cap, however, has limited its usefulness in areas of the capital, where property prices are high. Fewer than 20 people have used the product in some areas of inner London. Where they are used in London, the average purchase price of a home bought with a LISA is often pushing £400,000, demonstrating the challenges the £450,000 cap is posing. Should the government simply reform the LISA instead of scrapping it? Some experts wonder why the LISA needed to be scrapped – and instead say updating the existing product should have been the priority. Brian Byrnes, director of personal finance at Moneybox, said rather than replacing the LISA the government should have focused on increasing the house price cap and reducing the 25 per cent withdrawal charge. “If the aim is a simpler product for first-time buyers, reforming the LISA should be the starting point. A new product should only be introduced if it offers a material benefit that cannot be achieved by improving the one savers already use,” he added. Rajan Lakhani, personal finance expert at money app Plum, said the desire for the product among customers was shown by the fact that applications through Plum rose by nearly 300 per cent after the government announced it was seeking to replace it last year. “The updates should include increasing the price limit on property purchases, so it matches at least the average rise in house prices if not inflation.” He said the withdrawal penalty should also be cut, from 25 to 20 per cent. What advantages could the FTB ISA have? Experts have said a new ISA could be a much “much cleaner” approach for savers. David Hollingworth, associate director of communications at L&C Mortgages, said in some ways a focus on first-time buyers – as suggested by the name – made it clear what the product is for. “Getting more potential first-time buyers saving toward a deposit sooner should be the aim, as little and often is better than becoming disillusioned and giving up on home ownership altogether.” The amount of government bonus savers would receive under the new product has not been announced but Hollingworth noted it was important it was at least the same as the LISA. Byrnes, however, says there are downsides with the changes that are set to be made. Particularly, he said offering the bonus on completion would cut the amount given out by the government, because savers would never gain interest on the bonus. He said: “Someone putting away £333 a month over 10 years at a return of 6 per cent, could lose over £3,600 in lost interest growth, even with the headline 25 per cent rate unchanged. “The monthly bonus isn’t just a great motivator for making regular contributions, the interest earned on it makes a material difference to people’s house deposits over time.” Does either address the root cause? Amidst all the discussion over whether a LISA or FTB ISA is the best product – some experts say that a key element is being missed. The likes of LISAs and FTB ISAs are there to supposedly help younger buyers on the property ladder – but this doesn’t address the root cause of high housing prices. “An ISA can help someone build a deposit faster, it cannot fix house prices, mortgage affordability or the gap between earnings and property values,” Nouran Moustafa, financial and mortgage adviser at Roxton Wealth. Elliot Castle, chief executive of Castle Property Group, added: “You’re just handing people a bigger deposit to compete for the same shortage. “That pushes prices up, not affordability down. The more effective lever is protecting and growing housing supply itself, including the private rental sector that many first-time buyers rely on while they save.” Previous surveys have found that on average, first-time buyers with a LISA purchase a property four years earlier, at 29, than those who didn’t use the account. But is the LISA simply helping those who would buy a property anyway do so faster? Or is it genuinely helping those who could never get on the ladder without it?