Chancellor suggests Lifetime ISA changes are on the horizon as Martin Lewis urges him to help 'trapped' savers
The Chancellor Jeremy Hunt has hinted help could be on the way for first-time buyers who face losing £1,000s of their own savings when withdrawing funds from Lifetime ISAs (LISAs) to buy homes above the scheme's property price limit. MoneySavingExpert.com (MSE) founder Martin Lewis challenged Mr Hunt over the issue during an interview in the latest episode of ITV's The Martin Lewis Money Show Live.
Martin also explained how the LISA – which is still a powerful product – compares to the Help to Buy ISA, and answered the question of whether existing Help to Buy ISA savers should switch. See the video clip below for more on this.
Chancellor hints at changes to the LISA withdrawal penalty and property price limit
Martin and MSE have long called for the Government to overhaul "dead duck" LISAs to allow first-time buyers using LISA money to buy a home that's now over the scheme's £450,000 limit to withdraw the money without penalty immediately.
So far the Government has yet to budge on the rules, but during his interview with Martin this week, the Chancellor hinted that change could be on the way. Martin read out a query from a viewer facing a large financial penalty as a result of the existing LISA rules, demonstrating the unfairness in the current system.
In response, Mr Hunt said: "Well, look, I've now started to make my plans for the Budget, which is on 6 March, and I absolutely hear what you say on that. And, you know, consider the Chancellor properly lobbied on that point."
Savers are currently charged 6.25% of their own savings when buying homes above the limit, which hasn't changes since LISAs launched, despite average house prices rising in that period. In the longer term, we would also like to see the £450,000 LISA limit raised to catch up with average property price growth and for the threshold to be index-linked thereafter. You can see our full Lifetime ISA report for more detail.
From The Martin Lewis Money Show Live on Tuesday 9 January 2024, courtesy of ITV. All rights reserved. Watch the full episode on ITVX.
What Martin Lewis and Jeremy Hunt said – the full transcript...
Martin Lewis: "Harrison: 'I've had a Lifetime ISA since 2021. At the time the £450,000 cap was not a worry. I've been able to save £4,000 each year. My rent's gone up, prices are up 15% and our current rental property is now worth £600,000. I can't use my LISA to buy my first house, so I would have to take a large financial penalty.'
"In other words, to get the money out, he [Harrison] would have to give you, the state, money so he could then use that for a deposit on the property he wants to buy, which is what the state was encouraging to do. It makes no sense to me that the LISA cap wouldn't have gone up with house prices. People are now trapped by their LISAs because £450,000 doesn't get you very far, in London anyway.
"When will you either change the LISA threshold, or, as I've asked you to do, if people are buying their first property above £450,000, even if you don't give them the bonus, get rid of the penalty so they get back what they put in. It seems, it's an unfairness in the system, Chancellor."
Jeremy Hunt: "Well, look, I've now starting to make my plans for the Budget, which is on 6 March, and I absolutely hear what you say on that. And, you know, consider the Chancellor properly lobbied on that point. I mean, I do think we should be doing what we can to help people who want to buy their first house.
"I accept the purpose of the Lifetime ISA is actually to encourage people to save for their first house. So, if that's what people are using it for, that's a good thing. We obviously want to make sure that when the state is topping up people's savings, which is a very special deal that you get with the LISA, that it's being used for the purpose that was intended by taxpayers when we make that subsidy. But let me take that away."
Martin: "And hence why my solution is, if they are using it for the purpose intended, that you can effectively get rid of the 25% penalty to a 20% penalty... [addressing viewers] you don't need to know that. [Addressing Mr Hunt] You'll understand that."
Jeanette Kwakye, Martin's co-presenter said: "So Chloe's asking: 'I've saved £1,745 into my Help to Buy ISA. Should I keep saving here or change to a Lifetime ISA?'"
Martin: "A Help to Buy ISA is more flexible. The Lifetime ISA can give you a bigger bonus. I should say, one of the big questions about Lifetime ISAs is one I put to the Chancellor – we're coming to that as well in a moment. But let me answer this – I've been waiting to answer this one for a while, so I have a graphic here...
"Look, these are all about first-time buyers' ISAs. So these are people who have never owned a home before. The Lifetime ISA is the one that you can open now if you're aged 18 to 39. The Help to Buy ISA is closed to new applicants, but hundreds of thousands of people have them. Hence Chloe's question there, should she shift?
"Let me focus on the Lifetime ISA first. As with the Help to Buy ISA, the state adds 25% on top of what you've saved. You can put in a maximum £4,000 a year, so that means £1,000 of free money from the state each year for up to 31 years. So, hopefully you'll have bought a house a long time before that..."
Martin: 'The big problem with the Lifetime ISA is that you lose 6.25% of your own money if you don't use it for a qualifying home'
"The big problem with the Lifetime ISA – you get a 25% bonus on what you've saved, but if you withdraw it for any other reason than buying a 'qualifying' – key term – home, or once you're aged 60, they take 25% off. And those that are good at maths will know that 25% off a bigger amount, is more than 25% on a smaller amount. Lots of nods from the maths geeks over there... which effectively means a 6.25% penalty.
"Put it in practical terms: you max it out, you've got £20,000 in it – after a number of years – you take it out, not to buy a qualifying house; you take out £18,750. You give the state over £1,000 of your money.
"The problem? The maximum property price you can buy is £450,000. You cannot buy a house above that. That hasn't changed since 2017, even though house prices have gone up. That means in London, for example, in 26 of the 32 London boroughs, average first-time buyer prices are above £450,000 – less so in other parts of the country, but a real problem, especially in the south east of England.
"So if you wanted to buy a bigger property, you'd have to pay the penalty to get your money out, to use it as a deposit to the state."
'If a LISA is right for you, put a £1 in NOW to get the clock ticking'
"The Lifetime ISA pays at exchange, so you can use it for your housing deposit. One important thing to know once you open one, it has to be open a year before you can get the first-time buyer bonus. So, my big tip to anyone this may be worthwhile for – get £1 in. You put £1 in – tick tock, tick tock, the clock's ticking – then, when you want to use it, you can add your money in because it's been open a year, you could get the bonus.
"So, look at the Help to Buy ISA [graphic]. I'm not going to read through all this [referring to the graphic]. You can hopefully see the graphic – we'll keep a lock on that page. It loses in virtually every category except this one [referring to the withdrawal penalty] – if you want to take your money out of a Help to Buy ISA, there is no penalty."
Martin: 'If you're buying a qualifying house, the Lifetime ISA is better. If you're not, it's safer to stick with a Help to Buy ISA'
"So we go back, if you can put that question to me again, if you don't mind... The answer is, if you're definitely buying a qualifying house and you want to max it out, the Lifetime ISA is better for you. If you're not definitely doing it, it's safer to keep it in a Help to Buy ISA. Obviously, the property price you might be looking at makes a difference too, as the Help to Buy ISA is only £250,000 outside of London."
Jeanette: "I've got a success from Tom on that. Tom says: 'I put £1 in back in 2021/22 when this was mentioned to activate. Started looking in 2022 and completed beginning of 2023. Thankfully, I could use the LISA and got £1,000 for free. Thank you, Martin.'"
Martin: "Lovely to hear. Oh yeah. So the £1 tricks work and some people get thousands of pounds on it."