Why it may be necessary to future-proof the Lifetime ISA to ensure it remains valuable to your employees who may be saving for their first home.

2024 looks set to be a difficult year for first-time buyers. If your employees are looking to enter the housing market during the next 12 months, they might have considered a Lifetime ISA (LISA).

The tax-efficient LISA is a savings and investment product that comes with the draw of a 25% government bonus but strict rules can lead to high charges. There’s also the issue of an upper limit on house prices that could be especially prohibitive for those hoping to buy in London.

Keep reading for a closer look at the LISA, and why future changes might be necessary to ensure they remain a good option for would-be homebuyers.

More than half a million LISAs have been opened in the last 5 years

LISAs can be opened by UK residents aged 18 to 40, the first contribution must be made before they turn 40. They can be used to save up to £4,000 a year toward a first home, with up to £1,000 added by the government each year. Their money can be either saved or invested, depending on the type of LISA chosen:

Cash LISA – Like a traditional savings account, interest is received on the savings.
Stocks and Shares LISA – Money is invested in the stock market with returns dependent on performance.

Just as with other types of ISAs, LISAs are highly tax-efficient. There is no Income Tax to pay on savings interest, nor any Capital Gains Tax (CGT) on investment returns generated.

Your employees or their loved ones can then continue to contribute to the LISA until age 50. From this point, the account remains open and will continue to earn tax-efficient interest or investment returns, but they will not be able to pay into it or earn the 25% bonus.

The LISA must be used to help buy a first home and restrictions do apply.*

More than 500,000 LISAs have been opened since they were introduced in 2017. But, more than five years later, LISA rules might need revisiting if they are to remain popular among those looking to take their first steps onto the property ladder.

*A LISA can also be considered for retirement income. Full or partial withdrawals can be made from a Lifetime ISA, without paying a fee, from 60 years old.

Beware potential charges and be sure the money will be used towards a first home

A LISA is designed to provide help toward the cost of a first home. If your employees withdraw funds for any other reason before the age of 60, a charge will apply.

The government look to recoup their 25% bonus through a 25% charge; however, the charge is payable on the whole fund value. This means the government will take back more than they put in.

Example: Cash LISA fund of £12,500, made up as follows:

Investor contribution: £10,000

25% bonus: £2,500

The exit charge is then calculated on the full amount:

25% charge: £3,125

Amount received: £9,375

£625 is lost through not using the LISA as the government intended.

MoneySavingExpert recently confirmed that savers have lost more than £126 million since the LISA was launched. Of this, around £108 million came from recouped government bonuses, while £18.5 million was savers’ own cash.

In 2022/23, LISA savers were fined more than £9 million. This has led to calls for a change in the rules.

House prices are rising and the upper limit is especially prohibitive in London

There are several reasons, other than a house purchase, why savers might opt to withdraw their money. The cost of living crisis has affected millions of UK households and might have meant some families needed money urgently.

But there are other stipulations too. If the money is withdrawn within the first year of opening a LISA, even if the money is used to buy a first home, the charge applies.

There will also be a charge if buying a house that is valued at more than £450,000. This limit has remained the same since the LISA was introduced. During the same periods, house prices have risen by 33%.

This issue can be more or less of a problem depending on the type of first home the buyer is looking for, whether they are buying on their own or as a couple, and where in the country they are looking to buy.

According to MoneySavingExpert, in the 12 months to April 2023, the average cost of a first-time-buyer property in London exceeded £450,000. Outside of London, meanwhile, property prices in some parts of the UK – the East Midlands, the north west of England, Wales, and Yorkshire, for example – have increased by around 60%.

Rising house prices, and the value of charges taken, have led some in the sector to call for legislative change. FTAdviser reports that saving and investment app, Moneybox, has called for the price limit to rise in line with house price rises. Is this a change we might see in the future?

The LISA remains attractive for first-time buyers but they should consider seeking advice.

While changes to future-proof the LISA are needed, the product remains a tax-efficient way to help first-time buyers onto the property ladder.

Get in touch

As an employer, ongoing financial education can be beneficial, if you’d like to learn more about how you can support your employees with their financial wellbeing, we can help.

Email info@second-sight.com or call us on 0330 332 7143.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Investments do not include the same security of capital which is afforded with a deposit account.

By incurring a Lifetime ISA Government withdrawal charge you may get back less than you paid in.

Saving in a Lifetime ISA may affect your entitlement to current and future means tested benefits.

By saving in a Lifetime ISA instead of a qualifying pension scheme you could lose contributions by your employer, if any.

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. We recommend that the investor seeks professional advice on personal taxation matters.

Sources: https://www.moneysavingexpert.com/news/2023/11/lifetime-isa-fix-martin-lewis-chancellor-first-time-buyers-fined/ and https://www.ftadviser.com/investments/2023/11/07/moneybox-calls-for-changes-to-lifetime-isas/

Lifetime ISA – GOV.UK (www.gov.uk)

MSE-Locked-out-LISA-Jan23.pdf (moneysavingexpert.com)

Martin Lewis: Outdated LISA rules COSTING first-time buyers and need a radical overhaul (moneysavingexpert.com)