Brits saving to get their foot on the property ladder could be hit with penalties exceeding £11,000 due to current house price restrictions with the Lifetime Individual Savings Account (LISA)
Chancellor Rachel Reeves is being urged to ‘do the right thing’ and drop hefty penalties hammering swathes of first-time buyers. First introduced by George Osbourne in 2016, the Lifetime Individual Savings Account (LISA) have become a popular method of saving for later in life – or to assist Brits in getting on the property ladder.
Those with the account can stash away up to £4,000 every year from the age of 18-50, as long as the first payment is made before you turn 40. In return, the government will add a 25 per cent bonus to your savings, up to a maximum of £1,000. For example, if you save £4,000 – you’ll have a total of £5,000 after you receive the bonus. You can hold cash or stocks and shares in your Lifetime ISA or have a combination of both.
You can withdraw your funds once you’re over 60, if you’re terminally ill with less than 12 months to live, or are buying your first home. However, the big caveat with the LISA is that you can only purchase a house for £450,000 or less (in August 2024, the average price of a house in London was £531,000).
If you find a property above the £450,000 threshold and want to use your LISA funds, you’ll be hit with a withdrawal charge of 25 per cent. For example, if you save £800 – the government will give you a £200 bonus meaning you’ll have a total of £1,000. But, when you withdraw the funds, you’ll pay 25 per cent of the total amount, meaning you’ll have £250 deducted and £750 leftover (£50 less than what you started with).
Smart money app Plum recently conducted a Freedom of Information (FOI) request and found some LISA owners have been hit penalties in excess of £11,000 on unauthorised withdrawals, including those who purchased homes in excess of the £450,000 cap. It is therefore calling on the government to increase the LISA cap from £450,000 to £600,000.
In a statement sent to the Mirror, Plum spokesperson Rajan Lakhani said: “The upcoming budget offers Rachel Reeves the perfect opportunity to fine-tune the current LISA rules so young families can realise the dream of home ownership sooner. Even losing a sum of £1,000-£2,000 can be a major setback for a young couple shopping for their first home. It represents the cost of a home survey or your removal fees.
“Buying a first home is a huge decision, and the market has moved significantly since 2017. House prices have risen – but policy has not caught up. The high financial pressure of renting has made it difficult for people to save for their first homes, with first-time buyers increasingly well into their thirties and more likely to need family homes rather than classic starter flats. In many parts of the country, this is simply unachievable for £450,000. By raising the property price limit to a more equitable £600,000, Rachel Reeves can empower first-time buyers to buy the properties they actually need without fear of being penalised.”
The Treasury Committee is now asking for evidence on whether the Lifetime Individual Savings Account (LISA) is still an appropriate financial product nine years after it was created. The deadline is tomorrow (February 4) and seeks to gather views from the finance industry, consumers, and experts. You can learn more here.
Have you been stung by the LISA house price cap? Email liam.gilliver@reachplc.com for a chance to share your story
