The scheme allows first time buyers (plus older people saving for retirement) aged 18 to 40 to save up to £4,000 per year into a tax free account. The Government will then top up these savings with a 25 per cent bonus – a maximum pay-out of £1,000 per year. But this “free money” offer has a sting in its tail, and one which has caught out many of those hardest hit by the pandemic.
The catch is that the money can only be used to top up a pension or to buy a first home worth up to £450,000. If savers need to withdraw the money for any other reason, other than if they are diagnosed with a terminal illness, they are hit with a 25 per cent penalty charge.
This means that someone who saved £4,000 and earned a £1,000 bonus would have to pay back £1,250.
For first-time buyers struggling with London’s high prices and enormous deposit demands this system can be punitive.
The average deposit put down by a novice buyer in the capital currently stands at more than £130,000 according to Halifax, while the average first home costs £486,000. By that measure, using a LISA alone to save up a deposit would take more than a quarter of a century.
“It just does not feel like a practical solution for Londoners to get onto the property ladder,” said Matt McKenna, head of communications and research at personal finance comparison site finder.com.
He was also concerned that buyers can only use a LISA to buy a property worth up to £450,000. “That is increasingly hard to find in London,” he said. “The house price limit could be raised for Londoners.”
Many believe the level of penalty to pay for withdrawing money is unfair, and indeed the government did scale the penalty back to 20 per cent at the start of the pandemic (March 2020 to April 2021) so that those who suddenly lost their income wouldn’t be penalised for tapping into their savings.
But many experts say this change should now be made permanent.
Research by retirement firm Hargreaves Lansdown revealed that during the 2020/21 tax year savers were forced to pay out £34m in withdrawal charges to the Government, three times more than pre-pandemic levels. The firm believes charting a 25 per cent penalty is unfair and is calling for it to be reduced to 20 per cent.
Martin Shaw, CEO of the Association of Financial Mutuals, also feels the Government should stop penalising people who need to access their LISA savings in an emergency, and if not be more open about how the penalty system works at the start. “There is definitely an opportunity to make sure that it is more clear upfront,” he said. “We feel that the penalty should be removed indefinitely, which would equalise the LISA with ISA accounts.”
Despite this Shaw thinks the LISA is a good way to augment savings if you are confident you are not going to have to dip into the money. “The amount you can pay in is relatively limited, and I would certainly encourage people to use the LISA as long as they are sure they can make the long term commitment,” he said.