Advisers are calling for an overhaul for Lifetime Isas, to ensure the benefits meet current market conditions amid fears that some first-time buyers are being hit with unfair penalties.
These tax-efficient savings plans offer the equivalent of basic rate tax relief, but savers are allowed to make penalty free withdrawals earlier, provided this is to pay for a deposit on their first home.
However since Lifetime Isas were launched this early withdrawal has only been allowed to purchase properties priced at £450,000 or less — despite the fact that property prices have rocketed since then.
Research by AJ Bell shows that if this limit had been increased with house price inflation it would stand at £580,500.
Those who make withdrawals to buy a more expensive property face penalties. This will not only remove the government incentive, but in some cases will also reduce the value of the money people have saved into these account.
As well as allowing more generous withdrawals to enable savers to get on the housing ladder AJ Bell is also calling for the withdrawal charge of 20 per cent to be temporarily removed during the cost-of-living crisis. This charge was removed before during the initial Covid wave.
AJ Bell head of personal finance Laura Suter says: “Soaring house prices mean many first-time buyers have struggled to get on the property ladder, and the government’s refusal to increase the limit on the Lifetime Isa means well-intentioned buyers are being priced out of using it and then clobbered with an unfair exit penalty.
“Despite house prices having consistently risen in the past few years, the property limit for the Lifetime Isa has remained stubbornly at £450,000 since its launch in April 2017.
“On average, house prices across the UK have risen by 29 per cent since then. Many aspiring homebuyers will have signed up to the accounts years ago, not realising that it would take so long to get on the property ladder and that they might fall foul of the property limit in the future.
“What makes the situation more galling for first-time buyers who have been priced out of using the Lifetime Isa is that they now face losing some of their own money when they withdraw their cash from the accounts, thanks to the onerous withdrawal penalty.
“Anyone who exceeds the £450,000 limit, even by just £1, will be hit with the 25 per cent exit charge, as their purchase will no longer be within the rules.”
AJ Bell calculations show that is savers had contributed the full £4,000 annual limit since the Lifetime Isa launched, they’d have a £30,000 deposit saved once the government bonus has been added.
But if this is used to fund a deposit on a property of £450,001 or more, they will pay the 25 per cent exit penalty — a charge of £7,500.
AJ Bell points out that this means they’d end up with £22,500 in savings, £1,500 less than they contributed.
Suter adds: “The original £450,000 property limit was set so that the government bonus could be claimed by genuine first-time buyers, rather than wealthier individuals going on to buy a million-pound house. It also broadly tallied with the stamp duty support on offer for first time buyers, whereby those buying a property worth up to £500,000 got a tax break.
“However, the government has since increased the stamp duty limit for first-time buyers up to £625,000, leaving a stark gap between that and the Lifetime Isa limit.
“A move to increase the property threshold wouldn’t cost the government huge sums and would allow many more first-time buyers to benefit from the Lifetime Isa bonus boosting their deposit savings.
“If the new prime minister Rishi Sunak is looking for ways to win votes that won’t cost the earth, this is one.”