The Lifetime Isa was first unveiled in 2016 as a savings vehicle for people saving for their first home, or their retirement – but Martin Lewis has warned of ‘major holes’
Consumer advocate Martin Lewis has flagged “major holes” in the Lifetime Isa scheme while addressing MPs at the Treasury Committee.
The MoneySavingExpert.com founder said: “I think the Lifetime Isa has been a very successful product for first-time buyers, though has some major holes.” Introduced in 2016, the Lifetime Isa, commonly abbreviated as Lisa, is aimed at aiding individuals in saving towards their first home or retirement. Available to those aged between 18 and 39, it offers a Government bonus of 25%, capped at £1,000 annually.
Yet, there have been widespread appeals for an overhaul, particularly concerning the £450,000 cap on property purchases which no longer reflects the soaring house prices. There is also a 25% penalty on withdrawals not related to either purchasing a first home or retirement after age 60 – unless the account holder is terminally ill.
During his talk with the committee, Mr Lewis highlighted the misunderstanding around the charges: “Many people think that if you add 25% and take off 25% you get back to where you started. You don’t. You end up with 6.25% less than where you started.”
He also addressed the dilemma facing first-time buyers who withdraw funds for properties exceeding the cap. He said: “I think the urgent and the immediate action is to make sure that when someone is buying a house for the first time, the very worst case scenario is there’s a 20% penalty.”
Mr Lewis also highlighted how the static £450,000 house purchase cap can put people off saving into a Lisa in the first place. He said: “We have a succession of young people who are saving in the vehicle they have been encouraged to save in by the state, who are then trying to use their savings to buy a first-time property, but due to house price inflation their property has just tripped above the £450,000 level.
“And then not only do they not get the £1,000-a-year bonus they were intended to get, which I understand and it’s legitimate, there’s a threshold, they are fined by the state effectively 6.25% of their own money in order to withdraw that money to get the cash out.
“And the problem with that is not just for the individuals who it affects. When I do television programmes on the Lifetime Isa, I have to warn people about that. And when I warn them about that, because you have to have the caveat, you should only save in this if you are definitely going to buy a property under £450,000, instantly, we have a huge drop-out in the number of people who get it.”
He also highlighted the cut-off age for opening a Lisa, describing it as “age discrimination”. Mr Lewis said: “Why should a 41-year-old who’s never had the opportunity to buy a home not be able to open a Lifetime Isa?”
He also said the retirement-savings linked element of the product “is a problem” and that: “No big banks offer this product, because they’re worried about being done for mis-selling.”
Mr Lewis said: “If you ask me: ‘Who should use a Lifetime Isa for retirement?’. I would say no employee unless they’ve maxed out their auto-enrolment, because that smacks the pants off the Lifetime Isa for retirement savings, no higher or top-rate taxpayer, because the tax benefits on pensions are way better than the Lifetime Isa.”
He told the MPs: “You can see why, when the huge majority of the population should always be saving first in a pension, that the banks, with all the mis-selling campaigns… that the banks have gone, we just don’t want to touch this, because we’re going to get people telling us they used it for retirement savings and in 20 years they’ll say you should have told me to get a pension.”
Mr Lewis said that the lack of Lisa availability and marketing from mainstream financial providers “means that it has not had the take-up it should”.
Commenting on the evidence session, Charlotte Harrison, chief executive of home financing at Skipton Group, said: “At Skipton we have seen the appeal for Lisa is primarily for it to be used for a house purchase.
Seventy per cent of Skipton Lisa customers state they are using it to save for their first home, whilst 17% say that they are using for their first home and retirement and only 12% say that they are using it solely for retirement.”
She added: “The second edition of the Skipton Group Home Affordability Index analysed data from across 363 local authority areas in Great Britain, and forecasts that, by the end of 2027, the Lifetime Isa house purchase of £450,000 will fall below the average first-time buyer property price in 12% of local authorities in England.
“Our analysis provides compelling evidence that the purchase price limit of the Lisa needs to be raised to a minimum of £500,000 to ensure the Lisa product remains relevant for those it is designed to help.”
