"The Lifetime ISA is a powerful weapon for first-time buyers looking to build a deposit, but there is a growing consensus that some of the rules introduced in 2017 are starting to look a little outmoded. "
- Rajan Lakhani from savings app Plum
Chancellor Rachel Reeves is being urged to scrap Lifetime ISA penalties in the upcoming Budget as it emerged first-time buyers were charged penalties of more than £11,000 in some cases on withdrawals.
Under the current rules, LISA withdrawals are only authorised for retirement spending and first-time property purchases up to the value of £450,000.
The government imposes a 25% penalty on the total value of the savings pot at its closure for withdrawals outside these criteria – stripping out not just the 25% government bonus but also a chunk of the interest or investment growth too.
While there are multiple reasons savers can be penalised, the current £450,000 cap has attracted the most widespread criticism from LISA providers and first-time buyers.
Data released to smart money app Plum by HMRC under Freedom of Information rules has revealed that around 74,000 savers were hit with penalties in 2022-23, including 15,977 who were forced to hand back £1,000 or more. Some 6,139 savers were hit with penalties of £2,000+ while 851 potential homebuyers were fined £5,000+.
The top 25 penalties imposed by HMRC averaged an eye-watering £11,000 each – a huge chunk of a first-time buyer’s deposit.
While buyers in London, where average property prices stand at £536,052, are particularly exposed to the LISA cap, there are currently 28 local authorities outside the capital with averages above the £450,000 ceiling. These include Brentwood, Essex (£467,357), Sevenoaks, Kent (£500,569) and St Albans, Hertfordshire (£584,360).
If the purchase limit had been index-linked in 2017 when LISAs were first launched, the cap would now stand at roughly £583,000.
Rajan Lakhani of Plum, commented: “These findings show how the current ceiling is shutting people out of the housing market. There are currently dozens of local authorities across the country where the average house price is greater than the £450,000 cap, and that number is only set to rise in the future.
“The Chancellor has put home ownership at the centre of the Labour party’s programme for government. That’s why it makes sense to index-link the Lifetime ISA ceiling from the time of its launch and bring in a new limit closer to £600,000.
“Young people trying to get a foot on the housing ladder have enough challenges already without having to worry about potentially losing a chunk of their hard-earned savings.
“The Lifetime ISA is a powerful weapon for first-time buyers looking to build a deposit, but there is a growing consensus that some of the rules introduced in 2017 are starting to look a little outmoded.
“The upcoming budget offers Rachel Reeves the perfect opportunity to fine-tune the current LISA rules so young families can realise the dream of home ownership sooner.
“Even losing a sum of £1,000-£2,000 can be a major set-back for a young couple shopping for their first home. It represents the cost of a home survey, or your removal fees.
“Buying a first home is a huge decision, and the market has moved significantly since 2017. House prices have risen – but policy has not caught up.
“Moreover, the high financial pressure of renting has made it difficult for people to save for their first homes, with first time buyers increasingly well into their thirties and more likely to need family homes rather than classic starter flats. In many parts of the country, this is simply unachievable for £450,000.
“By raising the property price limit to a more equitable £600,000, Rachel Reeves can empower first-time buyers to buy the properties they actually need without fear of being penalised.”
