LISA0176

Written evidence submitted by Anonymous

I’d like to contribute to the Committee’s inquiry into the Lifetime Isa from both the perspective of a journalist who has written about it for more than five years, and as a first-time buyer who found the Lifetime Isa and the government bonus a huge help when my girlfriend and I bought our first flat in south-west London last year.

I’ll aim to answer most of the committee’s 10 questions, but to answer them in three subsections, which I hope is ok? Firstly, how it works as a first-time buyer tool, second, the muddled transition between it being a first-time buyer tool and a pension product, and finally, how it works as a pension product.

That’s the area I have the least amount of experience with both personally and professionally, and it feels a bit of a muddle, not least because many first-time buyers likely aim to save for a house deposit in cash, and pension savers should aim to save for their retirement in equities.

Ultimately though on the questions of value for money for the government and abolition, it should not be abolished. Regular polling by the Building Societies Association since 2016 - https://www.bsa.org.uk/information/publications/bsa-property-tracker - has consistently found raising a deposit has been seen as one of the biggest barriers to buying a property, and the Lifetime Isa is one of the few things out there that helps with that.

It would be bizarre for a government which is currently pushing financial regulators to look at supporting its aim of increasing homeownership, to scrap one of the few tools itself provides to do just that.

On the value for money front, HM Revenue & Customs’ published figures on the Lifetime Isa aren’t particularly detailed, but in the latest available year of 2023-24, savers withdrew £849.2 million from Lifetime Isas for house purchases.

If you assume 20 per cent of that comes from the government bonus (The top-up is 25 per cent of what you save, so if you saved £4,000 and got a £1,000 bonus, 20 per cent of £5,000 is the bonus), that comes to just £169.9 million. That feels a tiny amount of money in the grand scheme of government spending to help first-time buyers get a leg up.

As a first-time buyer tool:

The Committee is clearly already aware of two of the biggest issues that need to be addressed if the Lifetime Isa is to continue to be of help. The £450,000 house price limit has not been adjusted since its introduction in April 2017. If it had risen in line with the change in first-time buyer house prices, it would be at about £600,000.

I appreciate the view many have that this is a London and south eastern England issue. However, that is where the largest group of first-time buyers end up buying, according to the trade association UK Finance. That is where many young people’s careers are, and where they want to live.

The government’s previous Help to Buy Isa recognised the disparity in regional house prices when it was introduced. It had a two-tier property cap of £250,000 outside of London and £450,000 in the capital – although neither were subsequently increased either.

Analysis the estate agency Hamptons carried out for The Tines in 2022 found that in 45 of 331 local authorities in England and Wales - https://www.thetimes.com/business-money/money/article/five-ways-to-improve-the-lifetime-isa-9x6psphb0 - more than half of all properties went for more than £450,000, placing a huge limit on what first-time buyers using the Lifetime Isa were able to look at in those areas. I think the Treasury still takes the view that first-time buyers primarily look at one or two-bedroom flats – which in some parts of London such as where I live often go for more than £450,000 anyway. But as first-time buyers buy at an older age, Barclays recently said the average one is now 34, increasingly they look at larger family homes.

So while the house price cap may be a London and south east problem, it is only becoming an ever-larger one. It should be increased to £600,000, and pegged to future first-time buyer price inflation as measured by HM Land Registry.

The withdrawal penalty is slightly trickier, because how much damage it can do to someone’s savings depends on whether it is a cash or stocks Lifetime Isa because of the possibility of significant investment gains that’d skew the calculations.

My primary experience both as a user and a journalist is with the cash version, which I think comprise the bulk of Lifetime Isas, but you would have to ask HMRC. In that case, the current 25 per cent penalty is punitive in that it costs savers their own money as well as the bonus.

I don’t know if I think it should be withdrawn altogether. It seems fair the government should be able to recoup its bonus, but certainly in its current state it acts as a significant barrier for more people to open one, and for banks and building societies to provide them.

There is another aspect to the penalty that’s gone slightly under-the-radar post-Covid. Any savings in the Lifetime Isa count towards the means test for Universal Credit - https://www.thisismoney.co.uk/money/saving/article-8260703/Campaigners-call-Treasury-review-Lifetime-Isa-penalty.html - which pensions do not. If you fall on hard times, you are expected to pay the penalty to access your savings before being able to look at claiming benefits.

It is a ridiculous situation, and one the government temporarily changed - https://www.thisismoney.co.uk/money/saving/article-8277693/Treasury-reduce-Lifetime-Isa-penalty-20-April.html - during the Covid-19 pandemic when it dropped the penalty to 20 per cent for a year. There is absolutely no reason why it couldn’t make that change permanent.

The transition from first home saving to pension saving:

I think the Lifetime Isa works well, with one or two tweaks, as a savings account for first-time buyers. Where it starts to get a bit muddled is as a supplementary or replacement pension. Regardless, the transition between the two isn’t great.

You can only open one up to the age of 40, so if you wanted to move your money from a cash Lifetime Isa to a stocks Lifetime Isa you would need to make sure you opened both beforehand. And unlike every other type of Isa, you are limited to how much you can transfer from an old account each tax year – which is £4,000.

This means if you want to move your previous house deposit fund from a cash account into a stocks account to invest it for retirement, and you have more than £4,000 in it, it will take you multiple years to do so. Again, this isn’t the case with other Isas, or even with pensions.

And it also affects those trying to move their money from the old Help to Buy Isa, where the house price limit outside of London is just £250,000, into a Lifetime Isa - https://www.thetimes.com/business-money/money/article/help-to-buy-scheme-news-uk-2024-life-time-isa-9z3wbtz6j.

Both the age limit of opening an account and the limit on how much you can transfer from an old account could and should be looked at.

As a supplementary pension:

I am genuinely not sure if the Lifetime Isa should exist as a pension product. It feels like when George Osborne came up with it, he was trying to marry two very different goals with different savings strategies together – you would not save for a pension in cash and a badly-timed fall in the stock market could wipe a large chunk off your house deposit – and it is a bit of a mess. Plus, if you are any more than a basic rate taxpayer, the government bonus is worse than pension tax relief.

Nonetheless, as it is, there are some bizarre terms to the Lifetime Isa that stop it being as good a supplementary pension as it might be. Most notably you can only pay into a Lifetime Isa until you are 50, which is about 17 years earlier than the state pension age, and several years before you can access a workplace pension or Sipp. The age at which you can access the money, 60, assuming you hadn’t used it for a house deposit, is also not aligned with either the workplace/Sipp ages or the state pension age, so feels a bit arbitrary.

I hope this is of use with your inquiry. Again, I’d like to reiterate the Lifetime Isa is a very good tool for first-time buyers with the potential to help for years to come, with a bit of tweaking.

At a time when first-time buyers find it hard to raise a deposit while renting, borrow enough or afford mortgage repayments, abolishing it would be completely bonkers and send completely the wrong message for a government that says it aims to boost levels of homeownership.

February 2025