The Lifetime Individual Savings Account (ISA) is receiving renewed scrutiny as calls intensify for the government to adjust its long-standing property price cap. Introduced in April 2017, the Lifetime ISA allows savers to deposit up to £4,000 annually, with the government offering a 25% bonus. This bonus can be applied towards purchasing a first home or for retirement savings. However, the property bought must not exceed £450,000, a limit critics argue has failed to keep pace with the escalating UK housing market.
Jim Islam, chief executive of OneFamily, praises the Lifetime ISA as a valuable tool that has benefited thousands. Yet, since its inception, average house prices in the UK have surged by about 33%, leaving many potential homeowners ineligible to use their ISA savings without incurring penalties. Currently, between 700,000 and 800,000 Lifetime ISA accounts are active, with savers facing a 25% charge if they withdraw funds for properties exceeding the cap.
The rising cost of housing is most evident in London, where first-time buyers face average property prices of £464,000, with inner London figures reaching £546,000. These statistics starkly contrast with the more manageable average price of £258,000 for first-time buyers across England.
Katie Oliphant, a 26-year-old ISA saver, illustrates the dilemma faced by many. She has diligently contributed to her Lifetime ISA, redirecting funds initially saved for a vacation thwarted by the pandemic. Oliphant voices her frustration with the current cap.
“It [the £450,000 cap] is quite concerning,” – Katie Oliphant
“I don’t really see how that is fair … I just don’t understand why it [the cap] is there.” – Katie Oliphant
“but then they have these rules and regulations which disadvantage you” – Katie Oliphant
Oliphant hopes for governmental action to either increase the property price cap or reduce the withdrawal penalty. Her sentiments are echoed by Martin Lewis, founder of MoneySavingExpert.com, who advocates for an urgent overhaul of the Lifetime ISA rules.
“The government actually takes £1,250 off these young people, when all they have done is save in a government vehicle” – Martin Lewis
“That is not equitable. The scheme is broken.” – Martin Lewis
Lewis highlights that savers only receive their initial contributions back, forfeiting any bonus if they withdraw for properties above the cap.
“You get back the money you put in; you just don’t get the bonus” – Martin Lewis
He estimates that addressing these issues by adjusting the cap or penalty would cost "in the single-digit millions at most," advocating for change to support first-time buyers.
The debate has reached the political arena, with Labour MP Catherine West among those calling for reform. She identifies soaring property prices as a barrier preventing many from utilizing their Lifetime ISAs effectively.
“I will be using my platform in parliament to push for the government to reconsider lifetime Isa provisions to make saving more attractive to consumers” – Catherine West
A Treasury spokesperson acknowledged that all aspects of the savings tax regime are under review, including the merits of adjusting the Lifetime ISA property price cap. This statement offers a glimmer of hope for those affected by the current restrictions.