Lifetime ISA savers are increasingly finding themselves unable to use the funds for their intended purpose amid demands for an important rule to be changed. The savings scheme, which offers a 25 percent Government bonus on deposits, provides an annual boost of £1,000 if the maximum £4,000 is saved.
However, these funds are meant to be spent on helping buy your home. An important rule is that the property must not exceed £450,000 in value, meaning many savers can’t use the funds to buy their ideal property. Research from Hargreaves Lansdown found that the area with the highest proportion of their clients holding a Lifetime ISA is south west London, where the average cost for a first-time home stands at £545,000—nearly £100,000 over the limit for using the funds.
Out of the top 10 UK areas with the most ISA savers, half have first-time property prices exceeding £350,000.This includes Kingston, also in south west London, where first-home prices are around £452,000.
Sarah Coles, head of personal finance at Hargreaves Lansdown, commented to say: “House prices are closing in on the record highs of 2022, leaving first-time buyers with a mountain to climb in raising a deposit. In September this year, the average first-time buyer property hit £232,769 – just £1,000 off their post-pandemic peak.” She added: “The fact that mortgage rates remain relatively high – with the average 2-year rate at almost 5.4 percent – means monthly payments are also a horrible stretch unless they can build a reasonable downpayment.”
The wealth firm is calling for the Lifetime ISA rules to be changed so the property price limit is linked to house prices. Lifetime ISA funds can be used towards a first home, or you can access the funds once you reach the age of 60.
However, withdrawing for other reasons incurs a penalty – something the wealth firm also wants to see amended. Ms Coles stated: “The penalty also needs to be reassessed.
“The 25 percent penalty for accessing money for purposes other than buying a first home or for retirement not only removes the effect of the government bonus, it also applies a 6.25 percent penalty on people’s hard-earned savings. Cutting the penalty to 20 percent means people will not lose any of their own savings if they need to access their money early.”
Another limitation of Lifetime ISAs is that they can only be opened from ages 18 to 39, and deposits can only be made until age 50. Ms Coles suggested this should be altered to allow saving up until the age of 55, providing more opportunities for individuals to save for their retirement.
She added: “Analysis from the Hargreaves Lansdown Savings and Resilience Barometer has shown this would particularly help self-employed people, who are chronically under-prepared for retirement. This change would benefit 70 percent of the self-employed who missed out on the Lifetime ISA because they were too old when it launched.”