Are Lifetime Isas still worth it?

If you’re considering whether now is a good time to buy a house as house prices start to come down, then you’ll also be looking to take advantage of the Lifetime Isa if you qualify for one. But are Lifetime Isas still fit for purpose? 

Back in 2016, George Osborne used his eighth Budget as chancellor to unveil a new type of Isa for young people, where they could save to buy a home and for retirement all in one place. 

The Lifetime Isa – dubbed Lisa – was introduced a year later, allowing those aged under 40 to open the product, contribute up to £4,000 each tax year and receive a 25% bonus from the government. They could either save up to buy their first home, as long as the property cost £450,000 or less, or for a pension that could be accessed when they turned 60. 

The product seemed popular initially: it was more generous and flexible than the Help to Buy Isa, which closed to new customers in 2019. 

But five years since it launched, is the Lifetime Isa still worth it? A lot has happened in half a decade: house prices have rocketed by 30%, interest rates have risen sharply, and a pandemic that crushed many people’s finances exposed an unfair penalty hidden in the Lifetime Isa’s small print. The property price cap has been stuck at £450,000 since it launched – which campaigners say is penalising first-time buyers. 

We explain how the Lifetime Isa works, and whether it still makes sense to save into one if you’re looking to get onto the property ladder. 

How does the Lifetime Isa work? 

Like all Isas, the Lifetime Isa is a tax-efficient way to save money because any interest and investment gains are free from tax. 

However, with a Lisa, you also get a juicy 25% government bonus worth up to £1,000 every tax year, depending on your contribution. For example, if you pay £2,000 into your Lisa in a tax year, you’ll receive a £500 top-up. 

To open a Lifetime Isa, you must be aged between 18 and 39. Once you’ve opened the account, you can contribute up to £4,000 each year until you’re 50. 

The money you pay in counts towards your annual Isa limit (£20,000 for the 2022-23 tax year). Like adult Isas and junior Isas, you can hold cash or stocks and shares in a Lifetime Isa, or a combination of both. 

As mentioned, buying a first home worth up to £450,000 or using the money for later life (at age 60 or over) is what the Lisa is designed for. If you’re terminally ill, with less than 12 months to live, you can also access the account. 

But if you make a withdrawal for any other reason, you’ll be hit with a 25% exit charge. This effectively takes the government bonus away, but also takes some of your own money too. For example, if £10,000 was withdrawn from a Lisa, which triggered the exit charge, the bonus would be deducted plus £625 of your own savings too. 

The exit fee also applies if you try to use the cash for a property costing more than £450,000. “Anyone who exceeds the £450,000 limit, even by just £1, will be hit with the 25% exit charge on the Lifetime Isa, as their purchase will no longer be within the rules,” notes Laura Suter, head of personal finance at the investment platform AJ Bell.  

The exit fee was previously reduced to 20% during the pandemic  after an outcry over its unfairness – but it reverted back to 25% in April 2021. 

How popular is the Lifetime Isa? 

The number of first-time buyers using a Lifetime Isa to fund a property purchase has steadily risen each year. In the last tax year, 50,800 first-time buyers withdrew money to buy a home, according to the latest figures from HMRC. The average amount withdrawn was £13,192. 

However, an even bigger number of people – 77,550 – made an unauthorised withdrawal during 2021-2022, meaning they were hit by the 25% exit charge. These penalties were worth a whopping £33m in total. 

Further analysis of the last tax year reveals a worrying trend: the number of people using a Lifetime Isa to buy a property has fallen, while the number of people making unauthorised withdrawals has soared. 

For example, in May last year, 4,500 customers withdrew some of their money to get onto the housing ladder. In April 2022, that figure had dropped to 3,750. Meanwhile, 3,750 people made a withdrawal that triggered the 25% penalty in May 2021. Fast-forward to April this year and the figure has more than doubled to 8,900. 

This could be due to the impact of the pandemic and cost of living crisis – forcing people to raid their savings to top up their income – while the rise in interest rates has dampened demand from first-time buyers. 

Despite soaring house prices, the Lifetime Isa’s property price cap has remained the same, at £450,000. When the Lifetime Isa launched in 2017, the average UK house price was £208,000, but it has since shot up to £268,000. In London, the average home now costs £534,545, according to the Nationwide building society. 

Catherine West, Labour MP for Hornsey and Wood Green in north London, is campaigning for the government to “urgently upgrade” the “woefully inadequate” product, saying: “This cap doesn’t match the reality of first-time buyers or the cost of living in 2022.” 

She adds: “I am acutely aware that many in my constituency will have saved through the Lisa scheme and now face the prospect of not being able to use their savings due to the rise in house prices across London.” 

Suter at AJ Bell, adds: “The government’s refusal to increase the limit on the Lifetime Isa means well-intentioned buyers are being priced out of using it and then clobbered with an unfair exit penalty. “A move to increase the property threshold wouldn’t cost the government huge sums and would allow many more first-time buyers to benefit from the Lifetime Isa bonus boosting their deposit savings. If the new prime minister Rishi Sunak is looking for ways to win votes that won’t cost the earth, this is one.” 

Meanwhile, the investment platform Hargreaves Lansdown is calling for Jeremy Hunt to address the Lifetime Isa in his Autumn Statement. It says the 25% exit fee should be reduced to 20%, so savers only lose the government bonus, and not a chunk of their own money too.  

However, the Treasury defended the savings scheme, telling MoneyWeek: “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. At £450,000, the 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.” 

Is the Lifetime Isa still worth it?  

On the face of it, a 25% bonus on top of your savings sounds very attractive. It will boost your savings far more than if you relied on regular cash savings or stocks and shares Isa.  

The key is to work out how you would feel if you weren’t able to buy your first home with the money, for example because the property you ultimately buy costs more than £450,000, or because mortgages become unaffordable and you continue to rent. This would mean your cash would be locked up until age 60. If you withdrew the money earlier, the exit penalty would kick in.  

Salman Haqqi, personal finance expert at money.co.uk, comments: “Given the current uncertainty of the housing market, it is understandable that many first-time buyers will be unsure if or when they will be able to get on the property ladder, meaning they can’t be certain the savings will be useful to them.” 

He adds: “The £450,000 cap may be too low for first-time buyers wanting to buy a 3-4 bedroom property in, or around, London. But for those outside London, with recent predictions that house prices will soon take a dip, a Lifetime Isa may still be a viable option.” 

As with all financial products, it’s important to understand the small print, and also think about your own personal circumstances. Your age, financial goals, amount that you can save and attitude to risk will also be factors in deciding whether a Lisa is worth taking out.