Why the Lifetime ISA might need future-proofing as house prices rise

2024 looks set to be a difficult year for first-time buyers. If you or your loved ones are looking to enter the housing market during the next 12 months, you might have considered a Lifetime ISA (LISA).

The tax-efficient LISA is a savings and investment product that comes with the draw of a 25% government bonus but strict rules can lead to high charges. There’s also the issue of an upper limit on house prices that could be especially prohibitive for those hoping to buy in London.

Keep reading for a closer look at the LISA, and why future changes might be necessary to ensure they remain a good option for would-be homebuyers.

More than half a million LISAs have been opened in the last 5 years

LISAs can be opened by UK residents aged 18 to 40, you must make your first contribution before you turn 40. They can be used to save up to £4,000 a year toward a first home, with up to £1,000 added by the government each year. Your money can be either saved or invested, depending on the type of LISA chosen:

• Cash LISA – Like a traditional savings account, you receive interest on your savings.
• Stocks and Shares LISA – Your money is invested in the stock market with returns dependent on performance.

Just as with other types of ISAs, LISAs are highly tax-efficient. There is no Income Tax to pay on savings interest, nor any Capital Gains Tax (CGT) on investment returns generated.

You or your loved one can then continue to contribute to the LISA until age 50. From this point, the account remains open and will continue to earn tax-efficient interest or investment returns, but you will not be able to pay into it or earn the 25% bonus.

You must use your LISA to help buy your first home and restrictions do apply.*

More than 500,000 LISAs have been opened since they were introduced in 2017. But, more than five years later, LISA rules might need revisiting if they are to remain popular among those looking to take their first steps onto the property ladder.

*A LISA can also be considered for retirement income. You can make full or partial withdrawals from your Lifetime ISA, without paying a fee, when you turn 60.

Beware potential charges and be sure the money will be used towards a first home

A LISA is designed to provide help toward the cost of a first home. If you or a loved one withdraw funds for any other reason before the age of 60, a charge will apply.

The government look to recoup their 25% bonus through a 25% charge; however, the charge is payable on the whole fund value. This means the government will take back more than they put in.

Say you have a Cash LISA fund of £12,500, made up as follows:

• Your contribution: £10,000

• 25% bonus: £2,500

The exit charge is then calculated on the full amount:

• 25% charge: £3,125

• You receive: £9,375

You have lost £625 through not using your LISA as the government intended. If this charge affects you or a loved one, you won’t be alone.

MoneySavingExpert recently confirmed that savers have lost more than £126 million since the LISA was launched. Of this, around £108 million came from recouped government bonuses, while £18.5 million was savers’ own cash.

In 2022/23, LISA savers were fined more than £9 million. This has led to calls for a change in the rules.

House prices are rising and the upper limit is especially prohibitive in London

There are several reasons, other than a house purchase, why savers might opt to withdraw their money. The cost of living crisis has affected millions of UK households and might have meant some families needed money urgently.

But there are other stipulations too. If you withdraw money within the first year of opening the LISA, even if the money is used to buy a first home, the charge applies.

You’ll also pay the charge if your first home is valued at more than £450,000. This limit has remained the same since the LISA was introduced. During the same periods, house prices have risen by 33%.

This issue can be more or less of a problem depending on the type of first home you are looking to buy, whether you are buying on your own or as a couple, and where in the country you are looking to buy.

According to MoneySavingExpert, in the 12 months to April 2023, the average cost of a first-time-buyer property in London exceeded £450,000. Outside of London, meanwhile, property prices in some parts of the UK – the East Midlands, the north west of England, Wales, and Yorkshire, for example – have increased by around 60%.

Rising house prices, and the value of charges taken, have led some in the sector to call for legislative change. FTAdviser reports that saving and investment app, Moneybox, has called for the price limit to rise in line with house price rises. Is this a change we might see in the future?

The LISA remains attractive for first-time buyers but be sure to seek advice

While changes to future-proof the LISA are needed, the product remains a tax-efficient way to help first-time buyers onto the property ladder.

If you have loved ones who might benefit from taking out a LISA, just be sure they understand the risks attached and insist they seek advice before making any big decisions. To learn more about how our financial planners can help, email us at advise-me@fosterdenovo.com or call us on 0330 332 7866. Book a meeting.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Investments do not include the same security of capital which is afforded with a deposit account.

By incurring a Lifetime ISA Government withdrawal charge you may get back less than you paid in.

Saving in a Lifetime ISA may affect your entitlement to current and future means tested benefits.

Sources: https://www.moneysavingexpert.com/news/2023/11/lifetime-isa-fix-martin-lewis-chancellor-first-time-buyers-fined/ and https://www.ftadviser.com/investments/2023/11/07/moneybox-calls-for-changes-to-lifetime-isas/

Lifetime ISA – GOV.UK (www.gov.uk)

MSE-Locked-out-LISA-Jan23.pdf (moneysavingexpert.com)

Martin Lewis: Outdated LISA rules COSTING first-time buyers and need a radical overhaul (moneysavingexpert.com)