Campaigners are pressing for changes to a UK government scheme for would-be first-time buyers that “fines” people if they use it to buy a home costing more than £450,000.
Martin Lewis, the founder of MoneySavingExpert.com, is among those calling for an urgent revamp of the rules that apply to lifetime Isas, which let people save for a first home or for their retirement.
Lewis told Guardian Money this week that the scheme was, in its current form, “broken” because it unfairly takes money off some young people and they get back less than their investment.
Lifetime Isas were launched in 2017. Savers can pay in up to £4,000 each year until they are aged 50 and the government will add a 25% bonus to people’s savings – added monthly – up to a maximum of £1,000 a year.
That 25% bonus has proved very attractive – official data shows that 662,000 lifetime Isas had money paid into them in 2021-22. Today, the number of “live” accounts is probably between 700,000 and 800,000.
However, if a saver uses the scheme to buy their first home, the property must cost £450,000 or less – a cap that has stayed the same since April 2017, even though average UK house prices as measured by the Land Registry are up by about 33% since then.
If the cap had risen in line with this growth, it would now be about £600,000.
Savers who withdraw their money to spend on a property above the price cap face a 25% charge for an “unauthorised withdrawal”. This charge is designed to recover the government bonus but it also controversially grabs some of the saver’s original investment.
While official Land Registry data shows that the average price paid by first-time buyers is significantly below the £450,000 cap in most of the country – for England as a whole, it was £258,000 in August – the typical amount paid in Londonwas £464,000. In inner London the average was £546,000.
Lewis gives an example of how the current system is, in his view, failing buyers. If a young person has “maxed out” their lifetime Isa over the last five years and has paid in a total of £20,000, with the £5,000 bonus from the government that gives them a £25,000 home deposit.
Because of rocketing prices in their area over the past five years, the house they are buying is now a few thousand pounds above the £450,000 cap and they cannot negotiate any more money off it.
In this example, in order to access the deposit the individual will have to pay a 25% penalty charge. That means that not only do they not get the £5,000 bonus, they also have to hand the government some of their savings. After the 25% penalty is applied, they are left with £18,750 – making them worse off than if they had done nothing.
The example assumes no interest is earned, whereas in reality most savers will have made some returns. However, as interest rates have been low, the penalty is likely to have far exceeded any gain.
“The government actually takes £1,250 off these young people, when all they have done is save in a government vehicle,” Lewis said. “That is not equitable. The scheme is broken.”
Lewis said the solution is simple: if you have saved in a lifetime Isa and are buying a property costing more than £450,000, the penalty should be 20%, not 25%. “You get back the money you put in; you just don’t get the bonus.”
Lewis is hopeful the government will bow to pressure and amend the rules – possibly in the spring budget. “The government and chancellor are going to need to do things that people like but that don’t cost very much,” he said, adding that he estimates the amount of money it would cost to fix this would be “in the single-digit millions at most”.
In terms of the £450,0000 cap, Lewis said ministers needed to link the threshold to house prices, although he added that that was a policy decision, and his immediate focus was on people being “penalised for doing the right thing”.
Catherine West, the Labour MP for Hornsey and Wood Green in north London, has previously said that soaring prices meant many would-be first-time buyers were now locked out of using their lifetime Isas to buy their first home. She told Guardian Money this week: “I will be using my platform in parliament to push for the government to reconsider lifetime Isa provisions to make saving more attractive to consumers.”
Jim Islam, the chief executive of the financial company OneFamily, said the lifetime Isa was “an excellent product” that had helped thousands of people but that more could be done to support those who want to get on the property ladder.
Like Lewis and others, his company wants the unauthorised withdrawal penalty to be cut from 25% to 20%, and said that the £450,000 cap was now “outdated” and needed to be increased.
A Treasury spokesperson said: “At £450,000, the lifetime Isa price cap is well above the average price paid by first-time buyers for a home outside London, meaning it is appropriately targeted to support the overwhelming majority of first-time buyers across the UK.”
It is understood the government takes the view that removing or reducing the 25% withdrawal charge would encourage the use of lifetime Isas in ways for which they were not intended. However, it also indicated that it keeps all aspects of the savings tax regime – including the merits of increasing the lifetime Isa property price cap – under review.
There are several companies that offer lifetime Isas, and one of the top-paying ones at the time of writing was offered by the app-based provider Moneybox. It pays 4.25% interest (made up of a 3.5% rate, plus a fixed one-year interest bonus of 0.75%).
Katie Oliphant, 26, is one of several hundred thousand people paying money into a lifetime Isa. She lives in Cambridge and works as an HR coordinator at St John’s College, part of the University of Cambridge.
“If you’re wanting a two- or three-bed house in a nice area, it’s so expensive, and £450,000 might not be realistic,” she said of the scheme’s price cap.
Oliphant and her partner each have a lifetime Isa with OneFamily, a member-owned financial services company.
She took out her Isa in 2018, while in her final year at university, on the advice of her dad. She has been paying money in every month, including some cash that was originally going to be used for a trip that was scuppered by the coronavirus pandemic.
She now has £18,600 in her Isa, although last month she cancelled her direct debit because, with the current cost of living crisis, “I basically can’t afford it”.
Oliphant and her partner currently rent a one-bed flat in central Cambridge and intend to buy within the next five years.
She said she looked on the property website Rightmove and that for a two-bed flat with no garden or balcony in central Cambridge, they would be looking at spending about £450,000.
“It [the £450,000 cap] is quite concerning,” she said, adding that for people buying in some other parts of the country, a cap of this amount would not be an issue.
“I don’t really see how that is fair … I just don’t understand why it [the cap] is there.”
Oliphant said it was great that the government had set up a scheme such as this to help first-time buyers, “but then they have these rules and regulations which disadvantage you”.
