Is the Lifetime ISA still worth it? Have your say

The Treasury Committee has opened an enquiry to gather views on LISAs

When the Lifetime ISA was launched nine years ago, replacing the Help to Buy ISA, it was heralded as a fantastic way for aspiring homeowners to save for a deposit as well as offering another option to build a retirement pot.

But nine years on, has the LISA kept up? 

Some articles on the site contain affiliate links, which provide a small commission to help fund our work. However, they won’t affect the price you pay or our editorial independence. Read more here.

A Treasury Committee LISA enquiry

The Treasury Committee, a group of MPS, launched an enquiry on Monday, calling for views on the LISA and whether it’s still fit for purpose.

It’s asked the finance industry, members of the public and experts to answer a number of questions including:

• Is the Lifetime ISA a suitable pension savings product?
• Should the Lifetime ISA house price cap be raised in line with inflation, or removed?
• Should the annual Lifetime ISA limit be raised from £4,000?
• Should the Lifetime ISA be reformed in any other way? 

The deadline for submitting evidence is 5pm on Tuesday 4 February and you can do it here.

Lifetime ISA penalty charge

Here are Be Clever With Your Cash, we’re fans of Lifetime ISAs for first time buyers and list the top LISA accounts in our best buy tables. 

The 25% Government boost on up to £4,000 each year is unbeatable in the savings market and your returns are always tax free.

However, the LISA is far from perfect. One of the issues with these accounts is the withdrawal restrictions; you can only access your money if you’re buying your first home, are aged 60 or over or are terminally ill with less than 12 months to live. If you need to make a withdrawal for any other reason you’re hit with a 25% charge. 

This is essentially a 6.5% exit penalty and is particularly harsh. We know life can throw you a curveball at any time and it’s really unfair to be penalised if your circumstances change.

This penalty has always been unpopular and means you end up with less money than you put in.

In the 2022/23 tax year, the average of the top 25 penalties for these withdrawals was £11,000 according to HMRC data which was published by money app Plum. 

The Lifetime ISA house price cap

Another problem is that since the LISA launched, the house price cap hasn’t changed – despite house prices increasing significantly during that time. You can use your LISA savings to buy your first property as long as it doesn’t cost more than £450,000. Nine years ago, there would’ve been plenty of choice in a first-time buyer home within this budget, but now there’ll be far fewer.

Analysis by investment firm AJ Bell suggests that unless the threshold changes, first time buyers will be priced out of buying a terrace house in 54 regions across the UK by the end of this parliament. It says that even a typical flat could cost more than £450,000 in the next five years in 17 regions.

Age limit of the Lifetime ISA

The LISA age rules are a bit complicated and restrictive. 

You must be over 18 to open a LISA – but under 40. You must make your first payment into the LISA by your 40th birthday. 

You can pay in £4,000 a year, until you turn 50. After that you can’t pay anymore into the LISA or earn the 25% bonus. The account can stay open and you’ll still earn interest in the cash LISA or investment returns on the stocks and shares version.

How could Lifetime ISAs be reformed?

It’s too early to tell but campaigners have been calling for the withdrawal penalty to be scrapped and for the property cap to be increased. 

One of the Treasury Committee’s questions in the LISA enquiry is also whether LISAs should be abolished altogether – so who knows what will happen.

Labour didn’t make any changes to ISAs in the Autumn Budget but it has said, in its plan for financial services, it’s looking to ‘simplify’ the ISA landscape. So the Treasury Committee’s evidence could end up being very handy.