The Lifetime ISA, a government initiative aimed at helping individuals save for their first home or retirement, faces scrutiny over its effectiveness in today's economic climate. Introduced by then-Chancellor George Osborne in 2016 and available for purchase since 2017, the scheme is under fire for its outdated price cap on property purchases. Financial experts, including Martin Lewis and Dame Meg Hillier, are calling for a revamp of the Lifetime ISA, arguing that it no longer adequately serves those it intends to assist.
To participate in the Lifetime ISA scheme, individuals must be between 18 and 40 years old. Participants can deposit up to £4,000 each year until they reach the age of 50. The government enhances these savings with a 25% bonus, offering a maximum of £1,000 annually. Importantly, this bonus is tax-free, providing a significant incentive for savers. However, the scheme limits the purchase price of a home to £450,000, a figure that has remained unchanged since April 2017.
Since its inception, the number of "live" Lifetime ISA accounts has surged by nearly 40% over two years, reaching 755,000 in the 2022-23 period. More than 227,000 individuals have used their savings from a Lifetime ISA to purchase their first home. Despite this apparent success, the UK housing market has dramatically changed since the scheme's launch. Average house prices have climbed by more than a third since April 2017. If the Lifetime ISA's price cap had adjusted in line with this increase, it would now exceed £600,000.
The static nature of the price cap raises questions about the scheme's current relevance and effectiveness. The sentiment is echoed by financial experts who highlight the need for reform. In the 2023-24 tax year, the average amount withdrawn from a Lifetime ISA rose to £14,927, indicating increased reliance on these savings amid escalating property prices.
Dame Meg Hillier voiced her concerns regarding the scheme's viability:
“We believe there’s a question mark over whether the lifetime Isa still serves the best interests of those it seeks to help.” – Dame Meg Hillier
She further emphasized the need for an update:
“While the intention [of the lifetime Isa] is admirable, the execution may be outdated.” – Dame Meg Hillier
The calls for reform are gaining traction as stakeholders recognize the disparity between the Lifetime ISA's framework and current market realities. The unchanged price cap poses a significant barrier for many first-time homebuyers who find themselves priced out of potential opportunities due to rising property values.