Interest rates are ticking up, but even so, the thought of getting a 25 per cent boost on your savings is something most can only dream of.
If you’re under 40, it’s possible with the Lifetime Isa (Lisa).
Launched six years ago, the Lisa allows UK millennials to save for their first home, or invest for retirement. With a choice of cash or stocks and shares, if you pay in up to £4,000 of your Isa allowance every year you’ll get a 25 per cent government bonus on top worth up to £1,000.
This has worked very nicely for Isa investors like me (I conveniently turned 40 a few days after the Lisa’s 2017 launch). Now my account is open, I can pay in £4,000 every year until I’m 50 and grab a free grand.
I already own a property, so I’m investing my Lisa money for the long term. But if I take any money out before my 60th birthday, 25 per cent will be deducted (reflecting the bonus) and I’d have to pay a penalty on top equivalent to £62.50 for every £1,000 I withdraw, meaning I’d lose a chunk of my own savings too.
Most people use Lisas to save up a property deposit, but I’m being contacted by increasing numbers of readers in London and the south-east whose home ownership dreams are being dashed by the £450,000 property price cap.
Larissa, 33, works for a professional services firm and started saving into a Lisa before the pandemic.
“Properties in east London that were around £450,000 then are £550,000 now,” she says, noting that the cap hasn’t risen since 2017. Had it kept pace with average UK house price inflation, it would now be nearer £600,000.
So she faces the choice of searching for a cheaper property further away from central London or paying a penalty to withdraw the money she’s been carefully saving for years.
“I would have been better off just putting my money in the bank,” Larissa says. After withdrawal penalties are applied, she adds, “the money I use to trade crypto has done better than my Lifetime Isa.”
For a product that was intended to encourage young people to save and invest for the long term, this is regrettable.
Larissa could avoid the charges by reverse-engineering her Lisa into a long-term retirement savings pot, but if she wants to buy in London, she needs every penny she can get.
“It’s very tricky when you’re single and trying to get on the property ladder with no help from your family,” she says. “The government should at least let savers get their own money back if it turns out they can’t use the scheme.”
Ahead of the Budget next week, Money Saving Expert founder Martin Lewis has been campaigning for the cap to be raised, or the penalty waived for those who can provide evidence they’re buying a higher value home.
“This is about fairness to about half a million younger people the state sold a savings scheme to, that for some of them is now a dud,” he says. “If a private firm had done this, it’d be getting close to mis-selling.”
Money Saving Expert calculates that since 2017 £9.5mn of savers’ own money has been lost to penalty charges. A worry for new and existing savers, I’m not surprised that Lisa providers including Moneybox, AJ Bell and Hargreaves Lansdown are also lobbying for change.
But is there any hope the chancellor will listen?
“We keep all aspects of savings policy under review,” was the official word from the Treasury this week. But it said exactly the same thing in 2017 when I first flagged that the price cap would become an issue.
The Treasury maintains that the current level of the cap is well above the average price paid by first-time buyers for a home outside London and still above the average they pay in outer London (£420,000), adding: “It is appropriately targeted to support the majority of first-time buyers across the UK.”
Yet the Help to Buy equity loan scheme for first time buyers has a property price cap of £600,000 for London. Ending this month, there’s no sign of what — if anything — might replace it.
Our cash-strapped chancellor could be hoping a property price correction will fix the problem. But considering the length of time it takes to save up a deposit, the absence of a formal review mechanism would worry me were I saving to buy a home in the Southeast or another major UK city ten years down the line.
“The younger you start, the more you can potentially benefit,” says Brian Byrnes, head of personal finance at Moneybox. Its average customer is 26 when they open a Lisa, and the majority earn less than £35,000 a year.
Although only 1 per cent of its customer base had an issue with the price cap last year, he believes it “should reflect some measure of inflation to ensure a long-term future for the product”.
Reading between the lines, giving taxpayer-funded incentives to help people on high salaries buy a property in the capital is not what policymakers wanted the Lisa to enable.
But the hybrid nature of the Lisa’s design means people like me who already own a home, save into a company pension and have a spare £333 per month that we can afford to lock up until we’re 60 can extract the maximum benefit. As well as the annual £1,000 bonus, we also benefit from the Isa tax wrapper (increasingly valuable, given April’s CGT changes).
Investment platform AJ Bell tells me “a handful” of its Lisa customers have built a balance of over £50,000 (their average age is 37).
Like me, just over 11 per cent of Hargreaves Lansdown’s Lisa customers were 39 years old when they opened their accounts. Tesla is the top held stock among Lisa investors, and Hargreaves is cutting its platform fees from 0.45 to 0.25 per cent next week in a bid to attract more of them.
Clearly, this is a very different group of people from those struggling to get on the property ladder.
The Lisa has been praised for offering an easy pensions alternative to younger self-employed workers, who are highly likely to be saving nothing towards their eventual retirement.
Byrnes says the 25 per cent bonus “resonates far more than pension tax relief ever has as it’s much more visible and immediate”.
However, it is not specifically targeted at them.
Early critics of the Lifetime Isa said it was a poorly designed product that would end up doing two things badly instead of one thing well. Sadly, they were right.
Even if there’s no movement in the Budget next week, the drawbacks of the Lisa should be as prominent in the marketing of these products as the 25 per cent bonus.
Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. claer.barrett@ft.com
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