LISA0203
Written evidence submitted by the Skipton Building Society
Is the Lifetime ISA fit for purpose in 2025?
Summary
Skipton Building Society, which leads the Skipton Group, is one of the largest building societies in the UK, with 1.2 million members and more than £38 billion total assets (at 31 June 2024). The Group includes Connells, the UK’s largest estate agency network, which handles one in ten housing transactions and manages over 150,000 rental properties. The Skipton Group offers a distinctive insight into the housing market and understanding of affordability at the crossroads of homes and money.
Our purpose has remained the same since we were founded in 1853. We’re here to help more people have a home and help people save for their life ahead and support their long-term financial wellbeing.
In 2017 Skipton was the first provider in the UK to offer the cash Lifetime ISA (LISA). With more than 160,000 live LISA accounts, totalling £1.2 billion of savings we are one of the largest LISA providers. Our members can open and operate their savings accounts online, by phone and through our network of 82 branches throughout England and Scotland.
Alongside the LISA we are focused on helping more first-time buyers, enabling more people to achieve their home buying aspirations. For example, our groundbreaking deposit-free Track Record mortgage provides hope to renters across the country who want to own their own home with a track record of regular monthly rental payments but who, due to their high rents, have been unable to also save the significant sums needed for a house deposit.
In July 2024, we launched the Skipton Group Home Affordability Index, in partnership with Oxford Economics. The Home Affordability Index is a unique tool that harnesses data from across Skipton Group businesses, the ONS, and the Bank of England to provide fresh insight into the affordability challenges faced by renters, first-time buyers and homeowners by age, income, geography, and family-type. The first edition found that only 1 in 8 potential first-time buyers in the UK can afford the average first-time buyer property in their area. The next iteration of the Index will be launched later in February and will be more granular, analysing data from across 363 local authority areas in Great Britain.
LISAs have already been used in 227,000[1] house purchases (to March 2024). In the last tax year more than 755,000[2] accounts were opened showing that the appeal for LISAs is growing and we anticipate that there will be a significant increase in the amount of house purchases using a LISA over time.
We welcome the opportunity to respond to the Committee’s call for evidence and show how the LISA has been and continues to be a positive addition to the ISA landscape since its launch in 2017, unlocking affordability to support house purchases as well as, for some, retirement goals. In particular, the LISA supports the Government’s objectives to build financial resilience and supports access to home ownership, by incentivising savers to build up a deposit for home purchase.
However, nearly eight years on from launch, we believe the LISA proposition would benefit from several key changes.
For example, despite average house prices increasing by more than 32%[3] since 2017, the annual LISA subscription limit and house purchase price limit analysis have remained unchanged. Analysis from the second edition of Skipton Group’s Affordability Index, due to be published later in February, shows the purchase price limit needs to be raised to a minimum of £500,000 to ensure the LISA remains relevant for those it is designed to help. We would welcome any changes to the LISA which would enable it to support more first-time buyers.
And, while we understand that the withdrawal penalty is in place to incentivise savers to use their LISA savings for its intended purposes, for house purchase or retirement, the current 25% penalty is in excess of the 20% bonus received from the Government, which effectively means there is a 6.25% penalty for LISA customers who require access to their own savings, especially during the recent and ongoing increases in the cost of living. The withdrawal penalty should be reduced to 20%, ensuring that LISA savers are not losing capital as a result of changing circumstances.
In addition, we believe the age limit should be increased from 40 to enable more people to consider the LISA as an option for retirement planning.
Questions:
1. Is the Lifetime ISA fit for purpose in its current design, including as a combined product for house purchase and pension saving?
We believe that the appeal for LISA is primarily for it to be used for a house purchase. 70% of Skipton LISA customers state they are using it to save for their first home, 17% say that they are using for their first home and retirement and only 12% say that they are using it solely for retirement.
LISAs have already been used for 227,000[4] house purchases (to March 2024) totalling £3bn of LISA savings. In the last tax year more than 755,000[5] LISA accounts were opened showing that demand for LISAs is growing.
This shows that the LISA has been and continues to be a positive addition to the ISA landscape since its launch on the 2017 by helping people save a deposit for a house purchase, helping affordability, and retirement goals and building financial resilience.
However, the HMRC data also suggests that the volumes of unauthorised withdrawals, triggering the 25% penalty, are increasing year on year which is out of step with the volume of house purchase transactions (see Tale 1 below). This suggests there are more instances where LISA account holders need to access their money without buying a house, potentially due to cost of living pressures, elevated house prices stretching affordability or restrictions on LISA such as the purchase price limit not allowing the LISA to be used as intended.
Table 1: The number of individuals making withdrawals for house purchase and unauthorised withdrawals
Source: HMRC Annual Savings statistics 2024. Lifetime Individual ISA (LISA) tables: September 2024. Link
The LISA proposition has essentially remained unchanged since it was launched in 2017. Since then, average house prices have increased by 32.9%[6] (between January 2017 to November 2024) but the annual subscription and purchase price limits have not changed, which is reducing the effectiveness of the Lifetime ISA to be used for a house purchase.
Analysis from the second edition of Skipton Group’s Affordability Index, due for publication later in February, shows the purchase price limit needs to be raised to a minimum of £500,000 to ensure the LISA remains relevant for those it is designed to help.
The Government has ambitious targets for 1.5 million homes to be built and a commitment to affordable housing. Given we anticipate that, alongside the building of homes, housing affordability will remain a key challenge, schemes such as LISA have an important role to play to continue to help unlock affordability, especially for first-time buyers.
The effectiveness of the LISA for retirement planning is not conclusive at this stage. The LISA does provide the facility for savers to access their savings without penalty after the age of 60. However, the difference in retirement outcomes for LISA savers and pension investors can vary widely depending on tax relief from a pension and level of employer matched contributions. This creates a layer of additional complexity for those looking to plan for retirement. In addition, as a provider of accessible regulated financial advice, our experience is that many people do not seek financial advice for retirement planning until after the age of 40 and they will then not be eligible for the LISA.
2. How well do consumers transition between using the Lifetime ISA as a product for house purchase, to then a product for pension saving?
It's too early to say how consumers transition between using the LISA as a product for house purchase to a product for pension saving.
It will be at least 12 years before a LISA customer reaches the age of 60 and becomes eligible to make withdrawals for retirement purposes without incurring the penalty.
To date we have seen around 50% of customers retain their Lifetime ISA accounts following house purchase but only a limited number (<5%) have subsequently deposited in their account.
3. Given its policy purposes, is the Lifetime ISA value for money for the Government?
We believe that the LISA offers value for money for both the Government and individuals. It is unique in providing an incentive to save for a home purchase. This helps instil a savings habit and build financial resilience which are both Government objectives, in addition to unlocking affordability for a house purchase, particularly for first-time buyers and helping people save for retirement.
4. Is the Lifetime ISA a suitable pension savings product?
The LISA can be a good retirement option for some, especially for basic rate taxpayers or non-taxpayers who are looking to make additional savings for their retirement over and above the amount they get from employer matched contributions for in their workplace pension scheme, or for the self-employed.
If employer matched contributions are put to one side, the 25% LISA bonus offers the same headline benefit as basic rate tax relief. Someone adding £4,000 into a LISA will get a 25% bonus to top up to £5,000, and the same £4,000 into a pension would get 20% tax relief, giving £5,000 gross. The key difference comes on withdrawal, with the pension in the hands of a basic rate taxpayer returning £4,250 where the LISA would provide £5,000. Therefore, the LISA can offer a positive outcome for customers using it for retirement planning.
However, as outlined in the response to Q1, our experience is that many people do not seek financial advice for retirement planning until after the age of 40, when they would not be eligible for the LISA. Given this, the age limit should be increased from 40 to enable more people to consider the LISA as an option for retirement planning.
5. Should the Lifetime ISA be abolished?
No. We believe the Lifetime ISA service is a vital tool in unlocking housing affordability for first time buyers and it has the potential to compliment the pensions landscape for retirement planning.
6. Should the Lifetime ISA be reformed to remove the withdrawal penalty?
We understand that the withdrawal penalty is in place to incentivise savers to use their LISA savings, with the Government bonus, for its intended purposes, for house purchase or retirement. However, the current 25% penalty is in excess of the 20% bonus received from the Government, which effectively means there is a 6.25% penalty for LISA customers who require access to their own savings, perhaps for unforeseen expenses, especially during the recent and ongoing increases in the cost of living.
Financial circumstances can change unexpectedly and the level of this penalty for early access may discourage people from saving in the first place, especially younger savers. There is a case to allow a certain level of flexibility to encourage longer term savings.
Given this we believe that the withdrawal penalty should be reduced from 25% to 20%, ensuring that LISA savers are not losing capital as a result of their personal circumstances changing.
Alternatively, the Government could consider allowing a certain number of withdrawals without penalty, either on an annual basis or over the lifetime of the LISA.
7. Should the Lifetime ISA be restricted to those with no access to a workplace pension?
No, we don’t believe that the Lifetime ISA should be restricted to those with no access to a workplace pension.
This would create extra complexity while significantly restricting the target market. The complexity would result in additional administration for providers to check eligibility, potentially requiring checks with HMRC or DWP.
We believe that making the LISA a less restrictive and complex solution for retirement would be a better way to drive positive outcomes.
8. Should the Lifetime ISA house price cap be raised in line with inflation, or removed?
Yes. House prices have changed significantly since the launch of LISA in 2017. The average UK house price has increased 32.9%[7] since January 2017 whilst the LISA purchase price limit of £450,000 has remained unchanged in that time.
And as outlined above, the second edition of Skipton Group’s Home Affordability Index, shows the purchase price limit needs to be raised to a minimum of £500,000 to ensure the LISA remains relevant for those it is designed to help.
If the purchase price limit is not raised, more first-time buyers will not be able to use the LISA as a tool to unlock home affordability in their area.
Given this we strongly support an increase in the purchase price limit, broadly in line with house price increases, to allow the LISA to continue to be used for it intended purpose for house purchase in all areas of the UK.
9. Should the annual Lifetime ISA limit be raised from £4,000?
Similar to the purchase price limit, the annual LISA subscription limit has remained unchanged since the launch of the scheme in 2017.
With house price inflation, the overall contribution amount of the annual LISA limit has reduced in effectiveness meaning that many customers are having to save more to be able to buy their first home.
We would support any change which supports more first-time buyers to buy their own home.
10. Should the Lifetime ISA be reformed in any other way?
We believe the Government should consider allowing transfers from a maturing Junior ISA (JISA) to a Lifetime ISA. Incorporating JISAs into Lifetime ISA savings, either from inception or when a JISA matures, could help young savers maintain the savings habit and develop more focused savings goals, such as for future home ownership.
Conclusion
Skipton Building Society welcomes the opportunity to respond to the Committee’s call for evidence on the LISA, and we have shown how the LISA has been and continues to be a positive addition to the ISA landscape since its launch in 2017, unlocking affordability to support house purchases as well as, for some, retirement goals. However, we have also highlighted several areas where we believe the LISA would benefit from changes to enable it to benefit more first-time buyers. We would be pleased to discuss this further with the Committee.
February 2025