Martin Lewis: Chancellor needs to fix dead duck Lifetime ISAs to stop first-time buyers being fined to access their own money
Martin Lewis, MoneySavingExpert.com’s (MSE's) founder and chair, is today strengthening his call for the Chancellor to overhaul the Lifetime ISA (LISA) in his 22 November Autumn Statement. Young savers should not be essentially fined – and lose their hard-saved cash – when they purchase homes above the scheme's £450,000 limit. This is a problem that leaves far more at risk now than when LISAs launched in 2017.
LISAs are designed to help people aged 18 to 39 buy their first home or, much less popularly, to save for retirement. Savers get a 25% government boost when they use the funds to buy a qualifying first home. They’re a powerful product – still beneficial to many – which can give a huge boost to first-time buyers' savings.
Yet the LISA limit has been frozen since the product launched in April 2017. Since then – even after recent corrections – there has been substantial growth in property prices and this has not only led to some young people, especially in expensive urban areas, being priced out of the benefits, but having to pay a fine to access their own money.
Those buying above the current £450,000 maximum, who withdraw their deposit from a LISA only get back £937.50 per £1,000 they saved.
"Hello, I'm Martin Lewis of MoneySavingExpert.com, and this is an important warning for anyone with a Lifetime ISA, a LISA, or anyone aged 18 to 39 who one day wants to buy their first house. The Lifetime ISA is, on the face of it, a good product. And it is a good product for most people. But it is a dead duck product for many who are living in urban areas with a really big problem.
"And it's left many young people paying fines of hundreds or thousands of pounds to the government to access their own money they have saved to buy a first time house. I've today contacted the Chancellor, Jeremy Hunt, to ask him to fix Lifetime ISAs in the coming Autumn Statement. So I want to run you through briefly what the problem is, what the solution is too.
"So the Lifetime ISA is a tax-free savings account anyone aged 18 to 39 can open and it gives savers a 25% bonus free money on top towards either a first time property or if you wait until retirement. But it's not as good till retirement. So I tend to focus on it as a first-time buyers product. Yet the issue is this Lifetime ISAs launched in 2017 and there was a cap on the house that you could buy.
"You couldn't buy property worth more than £450,000 while house prices, even with current corrections, have gone up 33% in that time. But the Lifetime ISA cap hasn't changed and the problem is if you take your money out for any other reason than buying a first-time home, you pay a fine. So let's just run through this in practical terms so you can see the problem.
"So you've saved for five years in a Lifetime ISA the maximum amount of £4,000 a year. That means you now have £25,000 in there. You put £20,000 in and the state has added £5,000 on top. So you have £25,000. Yet the home that you were saving for, which was once under the property cap, is now above the property cap. So you can't use your LISA towards it.
"Of course you want to get your money out because you're going to need it for a deposit. But to get your money out for any other reason than buying a first time property or waiting until you're aged 60, which is a long time away, you have a penalty of 25%, so you've got £25,000, you lose 25% on it. That means you only get £18,750 back. In other words, £1,250 less than you put in.
"That fine goes to the state. Now it seems to me that is just plain wrong. What I'm asking the Chancellor to do is one of two things, or perhaps both. The simple one would be if someone's buying the property as a first time buyer above £450,000, just wipe the excess penalty, which actually means you have a 20% penalty. So at least people get back the money they put in. They may not get the bonus, but they get back the money they put in.
"More complicated but also doable is uprate the threshold link it to house prices so people can buy bigger properties on the Lifetime ISA. This is not that difficult to fix. I hope the Chancellor will do it in the Autumn Statement. He's talked about doing new things for first-time buyers. Well, my message is before you come up with any new fangled scheme, fix the dead duck scheme that we've already got.
"As for whether Lifetime ISAs are still worth it, well look, if you're going to buy a property, that's definitely way below the threshold. Yes, it's absolutely worth saving in a Lifetime ISA. As long as you know you're going to buy that property because unless they change the terms, you will face a penalty.
"There's more details on the Lifetime ISAs and the campaign the Chancellor on MoneySavingExpert.com. But I wanted to explain to you what I'm doing."
Key findings in MSE's new LISA research
- Since 2017, house prices have increased by 33%, while the LISA property cap of £450,000 has remained the same. LISAs can only be used on a property worth up to £450,000, but this maximum hasn’t increased since the LISA's launch in 2017. That's despite total UK property prices rising by 33% between April 2017 and August 2023 (the latest available data).
- In the 12 months to April 2023, average London first-time-buyer property prices were over £450,000 in 26 of its 32 boroughs, plus in Epsom, Guildford, St Albans and Wokingham in the south east of England.
- Outside of the south east, in the past five years, average first-time-buyer property prices have increased by more than 60% in some areas. This includes parts of Northern Ireland, the East and West Midlands, the north east and north west of England, Wales, and Yorkshire and the Humber.
- Since 2017, more areas of England and Wales have seen 40% or more of all homes sold over the LISA cap. In five years, homes also sold for over the LISA cap in more areas. Meanwhile, Bristol and York are among the areas to see the biggest growth in the proportion of homes sold over the LISA cap.
- That leaves the LISA a dead duck product for many who were encouraged by the Government to open them. To prevent this, we are renewing our calls on the Government to allow savers using LISA money to buy a home that's now over the limit to withdraw it without penalty immediately. In the longer term, we would like to see the £450,000 LISA limit raised to catch up with average property price growth and then index-link the threshold to house prices thereafter.
In practice, LISA savers get 25% added by the Government soon after their funds go into a LISA. So, for example, each £1,000 becomes £1,250. If they withdraw it not to buy a qualifying property before they’re aged 60, there’s a 25% withdrawal penalty, which reduces each £1,250 to £937.50 (ignoring interest for ease).
More stats on how house price rises have hit LISA savers are detailed below.
Martin: 'LISA savers not only have a dead duck product, but one with a poisoned beak'
Martin Lewis, MoneySavingExpert.com founder and chair, said: "There are rumours the Chancellor is looking to introduce new incentives to help first-time buyers. Yet the first port of call should be to fix the unfair scheme that’s currently in play. So I have formally contacted the Chancellor to urge him to make the system fairer.
"Many who have opened Lifetime ISAs (LISAs) with government encouragement now have not only a dead duck product – where they won’t get the promised 25% boost – but one with a poisoned beak, because they’re fined to get their money out.
"The simple solution, which could be put into immediate effect, is for a LISA holder purchasing a first-time property for more than the maximum house price, not to be fined (1). So, they lose the Government's 25% bonus, but they get their own money and interest back.
"The fine was originally put in place to stop people using LISAs for purposes other than what they were intended for. House-buyers aren’t doing that, so they shouldn’t be penalised; they should at least get back what they put in.
"A longer-term idea would be to link and backdate the LISA maximum to national or, better still, regional house price changes. So, those who open them have a legitimate expectation they will be able to use them to buy the type of house they’re considering."
(1) Technical note: In practice, to do this the Government would need to reduce the withdrawal penalty to 20%. This means each £1,000 savers put in gets boosted by 25% to £1,250. But savers only lose 20% of this amount if withdrawing, which leaves them with £1,000 (though interest means the calculation isn't always exact). A similar scheme was used during the Covid-19 pandemic to allow people to access their money.
Dead duck LISAs: Five key facts
1. Savers have been fined £18.5 million to access their own money since LISAs launched
In total, LISA savers have been charged £126.8 million – approximately £108.3 million of government bonuses and approximately £18.5 million of their own cash – to access their savings since April 2017. In the last tax year alone (2022/23), savers were fined approximately £9.4 million.
HM Revenue & Customs doesn't record why savers are withdrawing funds, and some of this will likely be due to people needing to access their cash because of the cost of living crisis, but it's unfair to charge those buying homes in good faith.
Technical note: In practice, you get 25% added by the Government soon after your funds go into a LISA. For example, each £1,000 becomes £1,250. If you withdraw it not to buy a qualifying property before you're aged 60, there's a 25% withdrawal penalty (which reduces each £1,250 to £937.50).
Our full Lifetime ISAs guide contains further info on how they work, as well as our current best buys for those whom a LISA still works for.
Andreas: 'I was shocked. I didn't think we'd lose our own money'
Andreas, who works as a financial analyst, said: "I knew we'd lose the government bonus, but I didn't realise we'd lose our saved money as well, given we were using the scheme for its intended purpose. That really shocked me, and I found it a tough pill to swallow.
"It's meant to be a scheme to help people buy their first home, but it actually ended up doing the exact opposite, as it took money away. We're fortunate enough that we could move in with family while we made up the shortfall, but there are a lot of people who can't do that, so it doesn't seem fair."
2. Average first-time-buyer property prices are now over £450,000 in some areas across London and the south east of England
According to mortgage approvals data from Bank of Scotland and Halifax, which are part of Lloyds Banking Group – the UK's largest mortgage lender – average first-time buyer prices in the 12 months to April 2023 were above the LISA cap in 26 of London's 32 boroughs.
The data also shows that average first-time buyer prices over the same period were above £450,000 in the London commuter belt areas of:
- Epsom, Surrey.
- Guildford, Surrey.
- St Albans, Hertfordshire.
- Wokingham, Berkshire.
3. Average first-time-buyer property prices outside of the south east of England have increased by more than 60% in five years in some areas
Bank of Scotland and Halifax's mortgage approvals data also reveals that average prices for first-time buyers increased by more than 60% between April 2017 and April 2023 in parts of:
- The East and West Midlands
- Northern Ireland
- The north east and north west of England
- Yorkshire and the Humber
4. More areas have seen 40%-plus homes sold over the LISA cap in 2022 compared with 2017
Homes have also sold for near to and over the LISA cap in more areas
Our analysis of the same data also found that between 2017 and 2022, homes sold for near to and over the LISA cap in more areas.
- In 2017: There were 243 postcode areas with median prices of more than £450,000.
- In 2022: There were 417 postcode areas with median prices of more than £450,000.
That's an increase of 72%.
Dan: 'It's unfair to have our money taken away – we used the LISA for what it was designed for'
Dan, who works in the rail industry, said: "I think it's very unfair. It felt as if our money was being taken away from us, despite us doing nothing wrong as we used the LISA for what it is designed for – buying a house.
"If we didn't have the support of family and savings to fall back on, I don't know what we would have done. We're very lucky, but others aren't so fortunate."
5. Bristol and York are among the major towns and cities to see the biggest growth in the proportion of homes sold over the LISA cap in the past five years
Meanwhile, our analysis of the same data found that areas outside of London where the largest number of homes sold for more than £450,000 in 2022 were as follows:
For further information on our LISA campaign, you can see our Lifetime ISA report from earlier this year, which includes our recommendations in more detail.