Martin Lewis is urging Chancellor Jeremy Hunt to use his Autumn Statement later this month to overhaul “unfair” aspects of Lifetime Isas, which are often used by first-time buyers to get on the property ladder.
The MoneySavingExpert.com founder and chair argued that young savers should not be essentially fined, and lose their hard-saved cash, when they buy homes above the scheme’s £450,000 limit.
With house prices having surged over the years, particularly during the “race for space” during the coronavirus pandemic, more people could potentially be at risk than when Lifetime Isas, also known as Lisas, launched in 2017.
Lisas are designed to help people aged 18 to 39 buy their first home, or to save for retirement. They can put in up to £4,000 per year.
The Government will add a 25% bonus to people’s savings, up to a maximum of £1,000 per year.
Those buying above the current £450,000 maximum, who withdraw their deposit from a Lisa, may only get back £937.50 per £1,000 they saved, MoneySavingExpert said.
It said this is because, in practice, Lisa savers get the 25% added soon after their funds go into the account.
So, for example, each £1,000 becomes £1,250. But if savers withdraw the money for reasons other than buying a qualifying property before they are aged 60, they could face a 25% withdrawal penalty, which reduces each £1,250 to £937.50 (ignoring any interest built up).
MoneySavingExpert.com said the Government should allow savers using Lisa money to buy a home that is over the limit to withdraw it without penalty immediately.
In the longer term, the consumer help website 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.
Mr Lewis 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 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.
“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.”
MoneySavingExpert.com highlighted the case of Andreas Hyde, 29 in London.
He and his partner had to forfeit some of their own Lisa savings to buy a two-bedroom flat in the capital, because the home was £20,000 above the Lisa limit at £470,000.
The couple were collectively fined around £1,500 of their own savings and lost around £6,000 of government bonuses on top, MoneySavingExpert said.
Mr Hyde told the website: “I knew we’d lose the government bonus, but I didn’t realise we’d lose our saved money as well, given we were using the scheme for its intended purpose.
“It’s meant to be a scheme to help people buy their first home, but it actually ended up doing the exact opposite, as it took money away.
“We’re fortunate enough that we could move in with family while we made up the shortfall, but there are a lot of people who can’t do that, so it doesn’t seem fair.”
MoneySavingExpert.com also highlighted the case of Dan Adams, 25, in Hertfordshire.
Midway through the buying process, Mr Adams and his girlfriend were made aware they could not use their Lisas to buy their two-bedroom house in Berkhamsted, as it cost over the limit at £530,000.
Collectively, the pair lost around £1,500 of their own savings, plus around £6,000 in government bonuses, which they had been relying on for the purchase.
Mr Adams told the website: “I think it’s very unfair.
“It felt as if our money was being taken away from us despite us doing nothing wrong as we used the Lisa for what it is designed for – buying a house.”
A Treasury spokesperson said: “The Lifetime Isa helped over 50,000 people get on the property ladder last year and while the average price of a first time home has increased, it remains below the cap across the vast majority of the country.
“As ever, we keep all aspects of the savings rules, including the Lisa, under review.”