Latest news with #LifetimeIsa
Scottish Sun
15 hours ago
- Business
- Scottish Sun
I'm stuck with a zombie first-time buyer savings account that is worthless – how YOU can avoid it
Help to Buy Isas are designed to get first-time buyers on the ladder - but there are big downsides SAVE ME I'm stuck with a zombie first-time buyer savings account that is worthless – how YOU can avoid it Click to share on X/Twitter (Opens in new window) Click to share on Facebook (Opens in new window) I opened my Help to Buy Isa six years ago after my step-dad told me I needed one as a first-time buyer hoping to get on the ladder. I was 25 at the time and more pre-occupied with spending, instead of saving money - but now I'm taking home ownership seriously, and I've realised the account is useless and I'm stuck with it. Sign up for Scottish Sun newsletter Sign up 2 Deputy consumer editor Lucy Andrews is peeved off about her Help to Buy Isa Credit: News Group Newspapers Ltd. 2 Millions of savers have a Help to Buy Isa, but there are downsides to the savings account Credit: PA Experts call them "zombie" accounts because they're slowly shuffling towards their expiry date, which is 2030, and many savers' money is stuck in these accounts. Help to Buy Isas were launched in 2015, and the big draw of opening an account was that you get free money from the government for your home. The government gives you an extra 25% on top of what you have saved. You can save up to £200 a month into these accounts, which means that for every £200 you save, the government adds £50, free, to your account. For example, if I saved £12,000 (the maximum) I could get £3,000 extra in theory. Sounds fantastic, but there is a drawback. The Lifetime Isa came along in 2017 to replace the Help to Buy Isa. Anyone aged between 18-39 can open one, and you can use it to save for a first home, or for your retirement. Instead of a monthly savings limit, there's a £4,000 a year savings limit on these accounts. Similarly, you get a 25% bonus from the government. So in theory if I saved the maximum £4,000 a year from 18 to aged 50 (after this point, you can no longer save into the account), I would also get a whopping bonus of £32,000. You can no longer open a Help to Buy Isa - applications closed in 2019, and you have until 2030 to get your bonus. My issue is that I'm stuck with a Help to Buy Isa, when really, I want a Lifetime Isa - which is a bigger, better version of the Help to Buy Isa. Pesky penalties There are several issues I have with the Help to Buy Isa. Me and my husband have been having serious conversations about whether to buy this year. If we go ahead with this plan, I won't be able to transfer my savings into a Lifetime Isa. That's because a Lifetime Isa needs to be open for at least 12 months to be eligible for a bonus. Otherwise, I'll have to pay a nasty 25% penalty on what I've saved in my account. When savers are hit with this penalty, they end up losing the 25% government bonus, but also see 6.25% of their own hard earned cash taken as well. Say you had saved £4,000 in a year, and earned a 25% bonus of £1,000. If you withdrew the total £5,000 in your account before 12 months has passed, you would pay a penalty of £1,250 - which means £250 of your own savings has been lost. Many savers have been stung by this unfair penalty. Over £75million worth of charges were paid by savers in the 2023/24 tax year, according to figures from HMRC. Another issue with the Help to Buy Isa is that the rules are way more restrictive. To qualify for the 25% bonus, your property needs to be worth £250,000 or under (or £450,000 or under in London). If you buy a property more than this amount, then you lose your bonus. Me and my husband aren't sure whether we want to stick in London or move to the country. We need to stay close to the city for work reasons, so we would need to buy in the South East. But with average house prices in this area at £380,428 according to the latest Land Registry figures, it's likely that we would buy a property that busts through the £250,000 threshold. The other annoying thing about a Help to Buy Isa is that you can only save a maximum of £12,000 into this account. That means the maximum bonus you can get is £3,000. With a Lifetime Isa, there is no limit on how much you can save into the account - which means that you get more free money from the government with these accounts. Also, the interest rates are often lower than what you can get on a Lifetime Isa. The big downsides mean that many savers are stuck with these accounts. Some two million people have a Help to Buy Isa with £5billion locked in them. If you do want to transfer your savings out of a Help to Buy Isa and into a Lifetime Isa, you will have to drip feed the money into your new account. You can save £4,000 a year into these accounts, so if you had £8,000 in a Help to Buy Isa, it would take two years to transfer out. If you're happy to make the transfer, you'll need to open a Lifetime Isa first before you move your savings over. Check websites like Which? to see which Lifetime Isas are the best. I realise me and my husband are privileged to be in a position where we are thinking about buying. But the issues with Help to Buy Isas just makes the whole process of getting on the ladder even trickier to achieve. And if there's one thing that would help boost the housing market - it's having more first-time buyers being able to get on the ladder.
The Sun
15 hours ago
- Business
- The Sun
I'm stuck with a zombie first-time buyer savings account that is worthless – how YOU can avoid it
I opened my Help to Buy Isa six years ago after my step-dad told me I needed one as a first-time buyer hoping to get on the ladder. I was 25 at the time and more pre-occupied with spending, instead of saving money - but now I'm taking home ownership seriously, and I've realised the account is useless and I'm stuck with it. 2 Experts call them "zombie" accounts because they're slowly shuffling towards their expiry date, which is 2030, and many savers' money is stuck in these accounts. Help to Buy Isas were launched in 2015, and the big draw of opening an account was that you get free money from the government for your home. The government gives you an extra 25% on top of what you have saved. You can save up to £200 a month into these accounts, which means that for every £200 you save, the government adds £50, free, to your account. For example, if I saved £12,000 (the maximum) I could get £3,000 extra in theory. Sounds fantastic, but there is a drawback. The Lifetime Isa came along in 2017 to replace the Help to Buy Isa. Anyone aged between 18-39 can open one, and you can use it to save for a first home, or for your retirement. Instead of a monthly savings limit, there's a £4,000 a year savings limit on these accounts. Similarly, you get a 25% bonus from the government. So in theory if I saved the maximum £4,000 a year from 18 to aged 50 (after this point, you can no longer save into the account), I would also get a whopping bonus of £32,000. You can no longer open a Help to Buy Isa - applications closed in 2019, and you have until 2030 to get your bonus. My issue is that I'm stuck with a Help to Buy Isa, when really, I want a Lifetime Isa - which is a bigger, better version of the Help to Buy Isa. Pesky penalties There are several issues I have with the Help to Buy Isa. Me and my husband have been having serious conversations about whether to buy this year. If we go ahead with this plan, I won't be able to transfer my savings into a Lifetime Isa. That's because a Lifetime Isa needs to be open for at least 12 months to be eligible for a bonus. Otherwise, I'll have to pay a nasty 25% penalty on what I've saved in my account. When savers are hit with this penalty, they end up losing the 25% government bonus, but also see 6.25% of their own hard earned cash taken as well. Say you had saved £4,000 in a year, and earned a 25% bonus of £1,000. If you withdrew the total £5,000 in your account before 12 months has passed, you would pay a penalty of £1,250 - which means £250 of your own savings has been lost. Many savers have been stung by this unfair penalty. Over £75million worth of charges were paid by savers in the 2023/24 tax year, according to figures from HMRC. Another issue with the Help to Buy Isa is that the rules are way more restrictive. To qualify for the 25% bonus, your property needs to be worth £250,000 or under (or £450,000 or under in London). If you buy a property more than this amount, then you lose your bonus. Me and my husband aren't sure whether we want to stick in London or move to the country. We need to stay close to the city for work reasons, so we would need to buy in the South East. But with average house prices in this area at £380,428 according to the latest Land Registry figures, it's likely that we would buy a property that busts through the £250,000 threshold. The other annoying thing about a Help to Buy Isa is that you can only save a maximum of £12,000 into this account. That means the maximum bonus you can get is £3,000. With a Lifetime Isa, there is no limit on how much you can save into the account - which means that you get more free money from the government with these accounts. Also, the interest rates are often lower than what you can get on a Lifetime Isa. The big downsides mean that many savers are stuck with these accounts. Some two million people have a Help to Buy Isa with £5billion locked in them. If you do want to transfer your savings out of a Help to Buy Isa and into a Lifetime Isa, you will have to drip feed the money into your new account. You can save £4,000 a year into these accounts, so if you had £8,000 in a Help to Buy Isa, it would take two years to transfer out. If you're happy to make the transfer, you'll need to open a Lifetime Isa first before you move your savings over. Check websites like Which? to see which Lifetime Isas are the best. I realise me and my husband are privileged to be in a position where we are thinking about buying. But the issues with Help to Buy Isas just makes the whole process of getting on the ladder even trickier to achieve. And if there's one thing that would help boost the housing market - it's having more first-time buyers being able to get on the ladder. What help is out there for first-time buyers? GETTING on the property ladder can feel like a daunting task but there are schemes out there to help first-time buyers have their own home. Help to Buy Isa - It's a tax-free savings account where for every £200 you save, the Government will add an extra £50. But there's a maximum limit of £3,000 which is paid to your solicitor when you move. These accounts have now closed to new applicants but those who already hold one have until November 2029 to use it. Help to Buy equity loan - The Government will lend you up to 20% of the home's value - or 40% in London - after you've put down a 5% deposit. The loan is on top of a normal mortgage but it can only be used to buy a new build property. Lifetime Isa - This is another Government scheme that gives anyone aged 18 to 39 the chance to save tax-free and get a bonus of up to £32,000 towards their first home. You can save up to £4,000 a year and the Government will add 25% on top. Shared ownership - Co-owning with a housing association means you can buy a part of the property and pay rent on the remaining amount. You can buy anything from 25% to 75% of the property but you're restricted to specific ones. Mortgage guarantee scheme - The scheme opens to new 95% mortgages from April 19 2021. Applicants can buy their first home with a 5% deposit, it's eligible for homes up to £600,000.
Daily Mail
2 days ago
- Business
- Daily Mail
How Lifetime Isas work: Compare providers and answer these questions before opening an account
A Lifetime Isa – or Lisa – gives you the ability to save up to £4,000 a year, with the Government topping up contributions by 25 per cent. It's designed to help you save for two scenarios only: buying your first home and retirement. You can potentially bag a total of £32,000 from the Government if you max out your contributions each year between the age of 18 and 50, the age at which you stop earning the Lifetime Isa bonus. The Government bonus sounds like a big giveaway, but there are a few things to consider before opening a Lisa. First, Lisas have sparked criticism amid fears they will encourage younger savers to shun pensions. For many, especially those with a work pension where their employer matches their contributions, pension saving is still a better deal and their Lisa should be supplementary to that. Lisas have also been under fire because the property you buy must cost less than £450,000. This level has stayed the same since the Lisa's introduction in 2017, despite house prices increasing over that time. Finally, there is a financial penalty if you withdraw money for any reason other than those stated. But in general, Lisas are a useful option for a specific group of people – those under 40 who are saving a deposit for a first home and meet the qualifying criteria. Here we look at how Lisas work, what types of products are available, and their benefits and pitfalls. We also examine which providers are on the market, giving you options for both a cash Lisa and a stocks and shares Lisa. What is a Lifetime Isa? A Lifetime Isa is a type of Individual Savings Account that's specifically designed to help younger people save for their first home or for retirement. The £4,000 you can save each year in a Lisa forms part of your overall £20,000 Isa allowance. The main draw of Lisas is the 25 per cent Government bonus on contributions. However, the accounts have stricter eligibility criteria and rules around what you can use your money for than other Isas. Eligibility Everybody aged 18-39 can open a Lifetime Isa. This includes those who already own a home and are saving into a pension, though the money can't be used for a house purchase unless you are a first-time buyer. You can pay into a Lisa until you're 50, meaning savers can potentially earn a total of £32,000 from the Government by stashing away £4,000 a year from the age of 18. Your account stays open after you turn 50, and your savings can continue to earn interest or achieve investment returns, but you can't make more contributions. If you are using a Lisa for retirement, you can only withdraw money once you reach the age of 60. If you're buying a home with someone else who meets the criteria, you can both use the Lifetime Isa for the purchase – giving you more bonus. Rules around accessing money You can only use the money when buying a first home worth up to £450,000, or for retirement when you reach 60. If you need to withdraw for other reasons, you're hit with a stiff 25 per cent penalty affecting your own contributions and not just the Government bonus. There's no withdrawal penalty if you're terminally ill with less than 12 months to live. Other good-to-knows Both cash Lifetime Isas and stocks and shares Lifetime Isas are available. You can hold multiple Lifetime Isas, but you can't deposit money into more than one in each tax year. The £4,000 maximum you can pay into a Lifetime Isa counts towards your annual £20,000 Isa allowance. If you have a Help to Buy Isa and a Lifetime Isa, you can only use the bonus from one to buy a house – but note that Help to Buy Isas are closed to new savers. What are the rules when buying a home using a Lifetime Isa? In our view, Lifetime Isas are best for first-time buyers who are definitely going to buy a property in the next few years. If you're considering opening a Lifetime Isa for this reason, you should be aware of the rules and eligibility criteria. For instance, you must be a first-time buyer. You can also buy with another first-time buyer and both use a Lisa and its bonus. It's possible to buy with someone who isn't a first-time buyer and use your Lisa, although they can't use their own Lisa if they were to have one. The property must cost less than £450,000 and the Lisa needs to be open for at least 12 months before you can use it for the purchase. You can't have previously owned a property, in the UK or anywhere else. It's worth noting that the property you purchase must also be in the UK. The scheme isn't for those purchasing a buy-to-let or holiday home – you must be buying a home you plan to live in. Finally, you have to be buying the property with a mortgage. How to access the money for a house deposit When you eventually buy a property, don't just withdraw the funds, because that will result in a penalty. Instead, the solicitor handling your purchase should deal with withdrawing the money. You'll need to tell them you're using a Lisa to buy the property. You can use the money towards the deposit when you exchange contracts prior to completion, although there can't be a delay of more than 90 days. If the sale falls through, your solicitor will be able to put the money and bonus back into your Lisa – though it must be the same amount. What Lifetime Isa providers can you choose from? Lifetime Isas can boost savers' pots, but in practice there aren't many providers on the market. This is particularly true of cash Lifetime Isas. Larger banks generally don't offer them, meaning cash savers can choose from a small group of less well-known providers. These include Moneybox, Paragon Bank, Plum and Tembo. The best cash Lifetime Isa provider by rate is currently Plum*, which is offering savers 4.75 per cent interest – although this rate drops by 1.14 per cent after 12 months. A dearth of products could pose problems for first-time buyers with a shorter time horizon. Investing is for the long term – the usual rule of thumb is a minimum of five years – so an investment Lifetime Isa probably isn't the right choice if you want to buy a home sooner than that. Compare stocks and shares Lifetime Isa providers Those interested in stocks and shares Lifetime Isas can choose from more recognisable names than cash savers. Providers include AJ Bell, Hargreaves Lansdown, Moneybox and Nutmeg. For do-it-yourself investors: AJ Bell You can open an AJ Bell Lifetime Isa* with a minimum of £250 or by setting up a monthly direct debit of at least £25. AJ Bell charges 0.25 percent annually on your investments. For shares, investment trusts, Exchange Traded Funds (ETFs), gilts and bonds, this charge is capped at £3.50 a month. In terms of trading fees, AJ Bell charges £1.50 for fund dealing and £5 for shares dealing. If you'd prefer to have your investments managed, you can choose one of AJ Bell's own ready-made portfolios. Just check the underlying ongoing fees for these funds. Hargreaves Lansdown You can open a Hargreaves Lansdown Lifetime Isa* with a minimum lump sum investment of £100 or by setting up a minimum monthly payment of £25. Investors pay an annual fee of 0.25 per cent on the first £1million held in funds, 0.10 per cent on the value between £1million and £2million and nothing on anything above that. There's no dealing charge for buying or selling funds. For shares, investment trusts, ETFs, gilts and bonds, the 0.25 per cent charge is capped at £45 per year. There are dealing charges, starting at £11.95 a deal if you make less than nine deals a month. You can invest in the shares, funds or trusts you like. If you prefer a more hands-off approach, you can pick one of Hargreaves Lansdown's ready-made Isa portfolios, tailored for different investment needs. Be sure to check any ongoing charges within the investments themselves. For hands-off investors: AJ Bell Dodl Dodl is AJ Bell's app for less experienced investors. You can open an Dodl Lifetime Isa account* with £100 or a £25 monthly direct debit. The range of investments is more limited than its full investment platform, but it still gives you more choice than other hands-off platforms. You can go for one of AJ Bell's seven ready-made portfolios, a selection of ETFs that track a market sector or investment theme, or pick from 80 shares available through the app. Dodl's account charge is low at 0.15 per cent, but be sure to check charges for the underlying investments. AJ Bell's own funds have ongoing charges of 0.31 per cent. Dodl offers a very competitive 4.32 per cent interest on cash held in your account. Moneybox Moneybox aims its Lifetime Isa at those saving a deposit for their first home, rather than targeting people investing for retirement. When you sign up, Moneybox offers you a choice of three risk-rated portfolios – cautious, balanced and adventurous. Moneybox gives you exposure to cash, global equities and global property equities through these funds. You can start investing with just £1. It charges £1 a month to cover transaction fees and also has a platform fee of 0.45 per cent. Investors pay fees for the tracker funds on top of this, with ongoing charges ranging from between 0.11 and 0.18 per cent per year. Nutmeg Nutmeg's Lifetime Isa has a minimum lump sum requirement of £100. You choose an investment style and risk level and then Nutmeg manages your portfolio for you. Make sure you check Nutmeg's fees. As a service that manages your investments, fees can be relatively high. For its actively managed investment styles, Nutmeg charges 0.75 per cent annually on up to £100,000 of investments and 0.35 per cent on the portion above that. Keep in mind there are also underlying fund costs. OneFamily You can open OneFamily's Lifetime Isa* with a minimum £250 lump sum investment or £25 a month direct debit. There are two fund choices. Global Equity is for investors willing to take on slightly more risk for potentially better returns, while Global Mixed is for more cautious investors. The annual management charge for these funds is high at 1.1 per cent. However, this is the only fee that OneFamily charges, making it more straightforward to understand. Is a Lifetime Isa worth it? Lifetime Isas are usually worth it for first-time buyers who know they'll definitely be purchasing a property in the next few years, and that the property will cost less than £450,000. This cohort stands to benefit the most from using the account, because the generous 25 per cent Government bonus can help them save for a deposit quicker than they may have otherwise been able to. It's a less useful account for saving for retirement. You must stop paying into it at 50, but you can't access it until you're 60 – so you'll miss out on 10 years' worth of saving. If saving into a Lisa means opting out of a workplace pension or missing out on employer contributions, the first port of call should be auto-enrolling to the pension and maximising employer contributions. However, a Lisa could still be worth it when used in combination with other accounts. And if you're part of a group that won't get employer contributions to a pension, such as the self-employed, the Government bonus is one way to receive a similar top-up. > The best mortgage rates for first-time buyers How to decide whether a Lifetime Isa is worth it for you There are many factors to consider when deciding whether to open a Lifetime Isa – and the drawbacks can outweigh the advantages for some people. Ask yourself the following questions when considering a Lifetime Isa: Do you think you'll need to withdraw money in an emergency? Lifetime Isas are not a good choice if you need easy access to your money. You'll lose a quarter of your savings when withdrawing, including from the bonus and any interest or investment growth you've built up. That's a hefty loss, so you need to be sure you can lock up your money until you buy a home or retire. Do you know how much you'll need to save for a home deposit? If you want to save for a home using a Lifetime Isa, you should know what sort of property value you'll be considering. Firstly, you can only buy a property worth £450,000 or less, which is potentially an issue in pricier locations such as the capital and for those who need a larger than usual first home, for example if they have a family. Secondly, it helps you plan how much to save in a Lifetime Isa. Any excess funds beyond your deposit will remain in the account, which you won't be able to access until you're 60 without penalty. Are you maximising employer contributions into a workplace pension? After you've bought a home, the Lifetime Isa turns into an inferior retirement product when compared with saving in a workplace pension. Auto-enrolment rules mean employers have to pay into your pension. Some employers go beyond the minimum they must contribute, matching your own contributions up to a certain amount. If saving in a Lifetime Isa means you're not squeezing the maximum contributions possible out of your employer, you're forgoing free money. The Lifetime Isa is only a decent retirement savings vehicle for the self-employed, who don't receive employer contributions towards their pension. Are you planning to use a Lifetime Isa within the next five years and are you ready to invest? If you're planning to buy a home within five years, it makes sense to open a cash Lifetime Isa and grab any bonuses during that period. Any period shorter than this is less than the timescale financial advisers traditionally recommend for investing over saving. But stick with cash for any longer than that and you're missing the opportunity for better returns. The hard work and risks of investing are practically invisible to people saving into workplace pensions. The vast majority are in a default fund, and don't have to think much about how their investments are managed. If you intend to hold an investment Lifetime Isa, you'll have to be more proactive and knowledgeable. Even when choosing a do-it-for-you platform such as Nutmeg, you should research its different investment approaches and think about how much risk you want to take. Many financial experts think one of the biggest risks of the Lifetime Isa is that young people will simply open a cash version and stick with it, potentially losing thousands of pounds of investment returns over the decades. That's on top of missing employer contributions into a pension, if they hang onto their Lifetime Isa as a retirement product after buying a home. Might you need to fall back on benefits at any point in your life? Lifetime Isa savings will be taken into account if you ever need to claim benefits, but pension savings are not included in the assessment. If you are in a weak financial situation or in the kind of precarious employment where you might have to rely on state benefits at some time in the future, any savings you build up will be protected in a pension pot. What income tax rate are you on? The Government pays tax relief on contributions to pension pots, in line with the principle that we all save for retirement out of untaxed income. It does this based on income tax rates of 20 per cent, 40 per cent or 45 per cent. So if you earn too little to pay income tax or are on the basic rate of 20 per cent, the Lifetime Isa bonus is a fair deal, especially if your primary goal is to buy a home. But if you are on the 40 per cent or 45 per cent rate, you will get more money from the Government if you stick with saving into a pension. Your Lifetime Isa fund will be tax-free when you eventually withdraw it, but your payments into the pot come from taxed income. The Lifetime Isa bonus evens the field for basic rate taxpayers, but not for those on the higher rates. With pensions, higher rate taxpayers get an extra boost at the outset from more tax relief - increasing the size of the initial fund which then benefits even more from investment compound growth. Pension withdrawals will be taxed as income in retirement, but many people end up on a lower rate in retirement than when they were earning a salary, so the overall system works in their favour. Compare the best DIY investing platforms Investing online is simple, cheap and can be done from your computer, tablet or phone at a time and place that suits you. When it comes to choosing a DIY investing platform, stocks & shares Isa, self invested personal pension, or a general investing account, the range of options might seem overwhelming. > This is Money's full guide to the best investing platforms Every provider has a slightly different offering, charging more or less for trading or holding shares and giving access to a different range of stocks, funds and investment trusts. When weighing up the right one for you, it's important to to look at the service that it offers, along with administration charges and dealing fees, plus any other extra costs. We highlight the main players in the table below but would advise doing your own research and considering the points in our full guide to the best investment accounts. DIY INVESTING PLATFORMS AND STOCKS & SHARES ISAS Admin charge Charges notes Fund dealing Standard share, trust, ETF dealing Regular investing Dividend reinvestment AJ Bell* 0.25% Max £3.50 per month for shares, trusts, ETFs. £1.50 £5 £1.50 £1.50 per deal More details Bestinvest 0.40% (0.2% for ready made portfolios) Account fee cut to 0.2% for ready made investments Free £4.95 Free for funds Free for income funds More details Charles Stanley Direct * 0.30% Min platform fee of £60, max of £600. £100 back in free trades per year £4 £10 Free for funds n/a More details Etoro* Free Stocks, investment trusts and ETFs. Limited Isa, no Sipp. Not available Free n/a n/a More details Fidelity * 0.35% on funds £7.50 per month up to £25,000 or 0.35% with regular savings plan. Free £7.50 Free funds £1.50 shares, trusts ETFs £1.50 More details Freetrade * Basic account free, Standard with Isa £5.99, Plus £11.99 Stocks, investment trusts and ETFs. No funds Free n/a n/a More details Hargreaves Lansdown * 0.45% Capped at £45 for shares, trusts, ETFs Free £11.95 Free Free More details Interactive Investor* £4.99 per month under £50k, £11.99 above, £10 extra for Sipp Free trade worth £3.99 per month (does not apply to £4.99 plan) £3.99 £3.99 Free £0.99 More details InvestEngine * Free Only ETFs. Managed service is 0.25% Not available Free Free Free More details iWeb Free £5 £5 n/a 2%, max £5 More details Trading 212* Free Stocks, investment trusts and ETFs. Not available Free n/a Free More details
Daily Mail
2 days ago
- Business
- Daily Mail
Lifetime Isa under scrutiny: MPs question whether too much cash goes to 'well-off' first-time buyers
An influential group of MPs has called for the Government to scrutinise the popular Lifetime Isa, amid claims the accounts disproportionately help well-off savers. The cross-party Treasury Select Committee said there are concerns that the money spent on Lisa bonuses 'may not be precisely targeted,' and said some benefitting from the scheme would be able to buy a house without this cash. Lifetime Isas or Lisas can be used by both first-time buyers and as a retirement pot, but the rules surrounding how much someone can pay into the account and when they can withdraw it are Savers can pay in up to £4,000 per year, and the Government will add a 25 per cent bonus on those contributions, so a maximum of £1,000. Lisa bonus payments are expected to reach more than £600million in the 2027-28 tax year, according to figures from the OBR. In the five years to 2030, Lisa bonuses are expected to cost the Government £3billion. The MPs said Lisas may not be the most effective way of using these funds to help first time buyers. According to His Majesty's Revenue and Customs, half of all bonuses that have been paid on Lisas so far were the maximum bonus of £1,000. Fund manager Mole Valley Asset Management, which was consulted as part of the report, said the product's 'design mainly benefits relatively well-off individuals rather than acting as a redistributive tool'. The report also examined the penalty for removing funds from a Lisa account. Savers can withdraw their funds, along with the bonus, when they purchase a first home which costs £450,000 or less, reach the age of 60 or have a terminal illness. If savers do choose to withdraw their funds for another reason, they will face a 25 per cent withdrawal penalty, which will knock out the Government bonus as well as eating into the savings the account holder has added to their pot. The withdrawal penalty would effectively see savers lose 6.25 per cent of their own contributions. 'An increasing number of people are making unauthorised withdrawals and incurring the withdrawal charge, which may indicate that the Lifetime Isa is not working as intended,' the report said. In the 2023–24 financial year alone, £75 million was paid in withdrawal charges, a 39 per cent increase on the previous year, according to Treasury statistics. Some 99,650 people made unauthorised withdrawals, while only 56,900 people used their Lisa to buy a home. The average amount taken out was approximately £3,000. Tom Selby, director of public policy at investment platform AJ Bell, said: 'Even the best-laid plans often go awry and it is unfair to punish people with an exit charge that goes beyond simply recovering the government-funded bonus. 'Reverting to the system used during the pandemic, when the penalty only matched the original bonus received on the account, would be a fairer approach.' Property price cap examined Unauthorised withdrawals from Lisas happen for two main reasons: either because the saver needs the money in an emergency, or because they end up buying a house which costs more than £450,000. Since the Lifetime Isa was launched back in 2017, house prices have risen by some 30 per cent, based on figures from the Land Registry's House Price Index. The average UK house price as of January this year was £269,000, rising to £564,000 in London. While house prices have risen, the property price cap for Lisas has been fixed at £450,000, meaning that many who have saved to buy a house using a Lisa have no choice but to buy below the limit, or to remove their funds from their account and pay the penalty. If the Lisa limit had kept pace with rising house prices, it would now stand around £600,000. Rachael Griffin, tax and financial planning expert at wealth manager Quilter, said: 'Many who have saved diligently find they cannot use their Lisa for the property they need without facing a financial penalty. 'There are numerous anecdotes of home buyers being constantly outbid by small sums over the threshold as the other interested party knows that by doing so the other buyer loses their ability to use their Lisa, effectively tying their hands.' But the Treasury Committee said: 'Any increase in the price cap is an increase in Government spending,' and warned that before the cap is raised, it will have to be evaluated whether Lisas are the most effective way of helping first time buyers. Could the Government scrap Lisas? The report concluded that the Government should assess whether the Lisa is the best way to support people who need help to get on to the property ladder. It said the data on who was using Lifetime Isas and their income level was 'mixed and inconclusive' - but that a n ongoing HMRC study would provide information on this. The report added: 'Given the scale of demand on the public finances, the Government must carefully consider whether significant spending on the Lifetime Isa is the best way of achieving its policy objectives. 'We are concerned that Lifetime Isa bonuses may involve significant spending of taxpayers' money in a way that may not be precisely targeted.' 'The Treasury must [...] assess whether the Lifetime Isa effectively targets people who need financial support. 'If the Lifetime Isa does not achieve that objective, the Treasury should consider whether the Lisa has a future in its present form.' But personal finance experts urged the Government not to scrap the accounts. Rajan Lakhani, personal finance expert at Plum, said: 'What's important is acknowledgement that the Lisa product has helped many people to buy a home who may not have been able to without the help that a Lisa product has offered. 'So whilst reform is welcome, removal of the product is not.' The report also said the dual purpose of Lisas, saving for a first home or a pension, was confusing for users. The Treasury committee report warned that the product's design could lead to savers making bad investment decisions - for example, saving for retirement in a cash Lifetime Isa, when investing the money would be likely to provide better returns in the long term. It said that 'The Lifetime Isa may divert people from saving in more efficient pensions.' Richard Stone, chief executive of the Association of Investment Companies, agreed with this statement, saying: 'The dual purpose of the Lisa could lead consumers to make poor asset allocation decisions. 'It's particularly concerning that consumers may be using cash to save over the long term for retirement rather than accessing the stock market.' Likewise, some Lisa holders will have a stocks and shares option, but this may not be suitable for those saving up to buy a house over the shorter term.
Evening Standard
2 days ago
- Business
- Evening Standard
Complexity of Lifetime Isas increases risk of savers making poor financial decisions
'We are still awaiting further data that may shed some light on who exactly the product is helping. What we already know, though, is that the Lifetime Isa needs to be reformed before it can genuinely be described as a market-leading savings product for both prospective home buyers and those who want to start saving for their retirement at a young age.'
