Lifetime Isa saving scheme ‘stopping some from buying a home’

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A government scheme designed to help people save for their first home is preventing some from buying a property and leaving others thousands of pounds out of pocket, MPs and campaigners have said.

They are calling on ministers to conduct an urgent review of the rules that apply to the lifetime Isa – which lets people save for a first home or retirement – because of fears they are penalising some first-time buyers.

If a person 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 have risen by 35% since then.

Catherine West, the Labour MP for Hornsey and Wood Green in north London, said that “with the rocketing price of property”, many first-time buyers “are now locked out of using their [lifetime] Isas to buy their first home”.

She added: “This is wrong and illogical, and the government must look again at these rules.”

One couple who have been paying into lifetime Isas since 2017 said the three- and four-bedroom houses they had been looking at were coming in at well above the price cap.

They had been expecting to receive a £10,000 cash bonus after managing to pay a total of £40,000 into their lifetime Isas. However, instead of getting a payout, they face having to hand £2,500 of their own savings to the government, making them worse off than if they had done nothing.

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The lifetime Isa was launched in April 2017 and lets people put in up to £4,000 each year until they are 50. The government will add a 25% bonus to people’s savings, up to a maximum of £1,000 a year. That 25% bonus has proved attractive, and it is thought that 1m lifetime Isas have been opened.

But the £450,000 price cap has remained unchanged, despite property values soaring. In April 2017 the average UK house price was £218,000, while in August this year it was £295,000, according to Land Registry data. In London, the average price was £552,000.

If the lifetime Isa price cap had risen in line with this growth, it would now be about £609,000.

A 25% charge is imposed if someone makes an unauthorised withdrawal, for example, if they buy a home costing more than £450,000. This is designed to recover the government bonus, but it also grabs some of the saver’s original investment.

Laura Suter, head of personal finance at the investment platform AJ Bell, said that when the government recently changed the rules on stamp duty in England and Northern Ireland, it said first-time buyers’ relief would now be applicable to properties worth up to £625,000 – up from the previous £500,000.

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“They’ve set that [£625,000] as a realistic first-time buyer purchase, yet the lifetime Isa limit has stayed stuck at £450,000,” she added.

A spokesperson for the Treasury defended the price cap: “The lifetime Isa is one of a number of ways the government is helping people to get on the property ladder and save for later life.

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“At £450,000, the lifetime Isa price cap is well above the average price paid by first-time buyers for a home outside London and comfortably above that paid by first-time buyers for a home in outer London, meaning it is appropriately targeted to support the majority of first-time buyers across the UK.”

‘This is unfair and not defendable’

David and Mary (they did not wish to give their surname), are both public sector workers in their early 40s and have two primary school-age children. They may lose out because of these rules.

The family quit London several years ago, in large part because they could not afford to buy there, and now rent in Gloucestershire, where they hope finally to own a home.

View image in fullscreenA housing estate in Gloucestershire. David and Mary say it is ‘extremely challenging’ to buy a family home for under £450,000. Photograph: Mark Boulton/Alamy

They have been saving into lifetime Isas since 2017, and between them have paid in £40,000.

“When my wife and I started saving into lifetime Isas, we anticipated comfortably being able to buy our first home under the £450,000 threshold – a home to accommodate a family of four,” said David.

“But now, where we live, as in many parts of the south of England, it is extremely challenging to buy a family home for under that threshold. Over the last two years house price inflation has been ridiculous.”

The couple had expected the scheme to give them a deposit totalling £50,000, made up of what they have paid in plus the government bonus. But – assuming they go ahead and buy a property costing more than £450,000, using the money they have saved – the 25% penalty will cut that £40,000 to £37,500.

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“We will actually get back £2,500 less than our investment in a government-backed scheme designed to help us. In effect, we need to pay the government £2,500 of our savings, and we’ve lost interest that would have been accrued via an alternative investment approach,” said David.

“This is not fair and it is not defendable. It runs completely counter to the government’s efforts to help first-time buyers.”

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