Lifetime ISA rules outdated, says OneFamily
OneFamily is calling on the government to change the lifetime ISA rules to make the product fairer for everyone.
Almost 6 million young people in the UK are missing out on using a lifetime ISA to save for their first home because the property price cap is too low for the current housing market.
That's according to our research, which found that almost a third (35%) of those we spoke to who don't have a lifetime ISA would be more likely to open one if the property price cap was removed or increased*.
So, although lifetime ISAs have helped thousands of people get on the property ladder since they launched in 2017, we believe two changes are now needed to reflect rising property costs and the cost-of-living crisis:
- We'd like to see the penalty charge reduced to 20% to avoid financially penalising people whose situation has changed since they opened their lifetime ISA.The current 25% charge on lifetime ISA withdrawals means if people need to access their money, HMRC will charge them more than the bonus it gave them.
- We also believe the property purchase price limit should be higher to reflect increases in property costs.
Lifetime ISAs can currently only be used to buy a property that costs £450,000 or less.
But with property prices at record highs, many people are now in a situation where the homes they're viewing are above this threshold, even if they hadn't intend to spend this much when they first opened the lifetime ISA. Average sold prices for properties in Brighton, for example, are currently £484,291 (as at November 2024).
If a lifetime ISA holder does withdraw money to buy a home worth more than £450,000, they will be charged the 25% government withdrawal charge, which will be more than the bonus they received on that money.
These two changes would provide more support to people, which is particularly important given the cost-of-living crisis. However, neither change was included in the 2024 Autumn Budget statement.
OneFamily's CEO, Jim Islam, has released a statement explaining why these changes are important:
"LISA changes are urgently needed to kick-start the first-time buyers’ market. Young adults are facing high rents and soaring property prices, so the government must give them a leg-up.
“The lifetime ISA (LISA) is a superb investment account that could be the solution. It helps young people to grow their savings and get onto the housing ladder, and they can earn a bonus of up to £1,000 a year.
“But if they have to dip into their nest-egg in an emergency then account holders are hit with a hefty penalty of 25%. They don’t just lose the bonus, but also a sizeable chunk of their hard-earned savings - and our customers tell us that this puts them off LISAs.
“It would be fairer to reduce the penalty to 20%, so they only lose the bonus that they’ve accrued.
“The outdated LISA house price cap needs to be reviewed too. It was set in 2017 and house prices have risen massively in the last seven years. The price cap works against those who have no choice but to live in a location where homes cost more.
“By updating the LISA, it could become an essential tool in helping the next generation to move out of rented accommodation and into the stability of their own homes.”
- Jim Islam, Chief Executive Officer, OneFamily
*This data is based on research that was conducted by Opinium, on behalf of OneFamily, between 14 and 19 February 2024, among a sample of 2,000 UK adults aged between 18-40. The data has been weighted to be nationally representative of this group.
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