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Lifetime ISAs might be scrapped – but why?

  1. 26 July 2018
  2. By Andi Michael

The Treasury Committee has called for the abolition of the Lifetime ISA (LISA), an ISA designed to help first time buyers save for their deposit, rewarding them with a government bonus of up to £1000 a year. The LISA is also a useful addition for self employed workers as it can be used as an addition to a traditional pension.
 



The LISA mainly benefits younger savers, as it can be opened from age 18 up until the age of 40, and you can continue saving up until your 50th birthday. The maximum amount you can put in is £4000 per year, and you’ll receive a 25% bonus from the government on what you put in. This means that if you put in the maximum amount every year from 18-50, you could earn over £30,000 in bonuses. It’s also tax free.

The LISA is designed only to help with buying a property or helping in later life. As such, if you withdraw the money for anything other than your property deposit, or before the age of 60, you’ll face a 25% withdrawal charge, losing the bonus.

So, why do the Treasury Committee want to remove it? They think it’s overly confusing (losing the 25% bonus if you use the money for other than it was designed for) and they think it might stop people opting into work place pensions.

However it’s clear that, especially for self employed workers, a supportive nest egg accessible in later life is a great advantage, and with news this week that the average first time buyer would need 13 times their annual salary to buy in London, most young people looking to get on the ladder would see a government bonus as an advantage.

The Lifetime ISA is often compared with the Help to Buy ISA, which is also designed to help first time buyers. However, the Help to Buy ISA has a much lower limit of what you can put in  - £200/month.

The Lifetime ISA also has the added advantage of being used on properties up to the value of £450,000, whereas with the Help to Buy ISA, that amount is only for London properties – everywhere else you must be buying a property worth £250,000 or less.

So why is the first time you’re hearing about the Lifetime ISA when the government are threatening to shut it down? It hasn’t been well publicised, certainly not as much as the Help to Buy ISA, which is a prominent part of the Help to Buy developer’s promotion. Only a few banks and building societies have taken it on, to see how it has been received.

Lifetime ISA providers include: Skiptons Building Society, Hargreaves, Lansdown, AJ Bell and Nutmeg.

The main arguments against appear to be coming from MPs who don’t want the product to replace the auto-enrollment of workplace pensions, those who say self-employed workers should have access to decent state pensions and that the 25% charge if you access the money for something other than a property or in retirement is confusing.

We would be interested to hear from the voices of young people who have used a Lifetime ISA to save for their deposit, and what a difference that bonus has made to their saving efforts.

One Lifetime ISA user shared her view on the Treasury’s call to remove the LISA:

It’s rather telling that a scheme that truly benefits young people and rewards them for saving and investing in their future is not being supported by this government. The Lifetime ISA has been the first tangible step for me in saving for a home –with the average deposit in the South East now way over £50,000, the LISA has made me feel like I am making progress and it has motivated me to keep saving. I think it’s terrible it hasn’t been more widely advertised to young people thinking about their futures.”

With first time buyers working harder than ever to get on the property ladder, and the need for an active and steady property market, a Lifetime ISA might be just the thing young savers need to feel like owning their own home isn’t out of reach.
 
You can find out more about the difference between Lifetime ISAs and Help to Buy ISAs in our article – be sure to let us know what you think, and whether you’ve used a Lifetime ISA.
 
 

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