Martin Lewis gives advice on saving with a lifetime ISA
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A new report from Money Saving Expert (MSE), the consumer website founded by Martin Lewis, urges the Government to update the rules and “outdated” thresholds linked to Lifetimes ISAs (LISAs). They say the Government should allow savers using LISA money to buy a home now over the limit to withdraw the funds without penalty and/or raise the LISA limit.
They suggest the £450,000 limit be raised to £607,500 to catch up with the average house price growth in the UK since 2017, and then index-link the threshold to house prices thereafter.
According to the report, which has been sent to the Treasury and the Financial Conduct Authority (FCA), this step should keep roughly the same proportion of first-time buyers eligible for LISA bonuses as originally planned.
It suggests the threshold should then be automatically uprated (or downrated) in line with average house prices each year.
If the rules were changed to allow LISA savers to buy a property worth more than £450,000, it’s proposed the penalty would be reduced from 25 percent to 20 percent – similar to the temporary penalty reduction which came into effect during the COVID-19 pandemic.
This measure would see savers lose the 25 percent Government bonus, of up to £1,000 per tax year, accrued on the funds, but none of their own money.
Currently, a saver who buys a home which is no longer eligible will effectively pay a 6.25 percent penalty to get their money out.
The report suggests the transaction could be verified by the conveyancing solicitor.
Martin Lewis, founder of MoneySavingExpert.com, said: “This isn’t about pumping the housing market – this is about fairness to about half a million younger people the state sold a savings scheme to, that for some of them is now a dud. If a private firm had done this, it’d be getting close to mis-selling.
“Savers had a legitimate expectation that – over six years, amid huge house price inflation – under a fair system there would have been some uprating to the maximum house purchase limit.
“Without it, a chunk face being priced out, having to spend more on a property, and then having to pay the state a fine to access the money they’d put aside for a deposit.
“Then, to take the biscuit, the fact they then have a reduced deposit can decrease the value of the mortgage they will be accepted for.
“The changes we’re asking for – either ditching the fine for those buying houses that no longer qualify or increasing the threshold, or both – are simple, easy to put into practice and would cost a relatively small amount in Government terms.”
A Lifetime ISA offers first-time buyers aged 18 to 39 the opportunity to save up to £4,000 a year in the account up to the age of 50, and get a 25 percent Government bonus on the savings.
Half a million savers have put money into a LISA since its launch.
A person can withdraw money without penalty from their ISA if they’re buying their first home under qualifying circumstances, aged 60 or over, or terminally ill, with less than six months to live.
For the former reason, the property must cost £450,000 or less, and the buyer must buy with a mortgage, use a conveyancer or solicitor to act for them in the purchase, and buy the property at least 12 months after making the first payment into the LISA.
Otherwise, for any other reason, the saver will need to pay a withdrawal charge of 25 percent if they remove the cash or assets.
According to MSE, some 155,600 LISA savers made withdrawals other than to buy a qualifying first home between April 2017 and April 2022, meaning they forfeited £9.5million of their own money in penalties.
Jess Rostron, 38, is a LISA saver, having taken out the account in 2018. When the architect, from London, learned her landlord was selling the rental property in June 2022, she and her partner looked into buying their first home together – but the LISA threshold meant they soon ran into difficulty.
She said: “A £450,000 limit seemed like a reasonable cap for a first-time home in London when LISAs launched, but now it’s not. It’s really disappointing and frustrating.
“I feel I’m trying to use a Government scheme for exactly what it was intended for, but can’t. And if I’d wanted to use this money for retirement, I’d have put it directly into a pension.”
Withdrawing the funds from her current £18,800 LISA pot would see Jess lose £4,700 in capital, interest and bonuses, and leave her £940 out of pocket, including any interest accrued.
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