Martin Lewis: Chancellor needs to fix dead duck Lifetime ISAs to stop first-time buyers being fined to access their own money

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 (1).

Key findings in MSE’s new LISA research:

·       Since 2017, house prices have increased 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. Meanwhile, Bristol and York are among the areas to see the biggest growth in the proportion of homes sold over the LISA cap in the past five years.

·       That leaves the LISA a dead duck product for many who were encouraged by the Government to open them. To prevent this, MSE is renewing its 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. In the longer term, MSE 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.  

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 (2). 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."

More facts about the LISAs problem and supporting case studies can be found below, plus see MSE’s Lifetime ISA report which explains Martin and MSE’s original calls for changes to the LISA system earlier this year.

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Notes to editors

(1)   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).

(2)   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
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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.

2.     Average first-time-buyer property prices are now over £450,000 in some areas across the south east of England. According to mortgage approvals data from Bank of Scotland and Halifax, average first-time-buyer prices in the 12 months to April 2023 were above the LISA cap in 26 of London’s 32 boroughs.