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Chancellor urged to reform Lifetime and Help to Buy ISAs

Chancellor urged to reform Lifetime and Help to Buy ISAs
Anna Sagar
Written By:
Anna Sagar

The Building Societies Association (BSA) and The Investing and the Saving Alliance (TISA) want a cut in withdrawal penalties and change in price thresholds for Lifetime ISAs and Help to Buy ISAs to aid first-time buyers.

The Lifetime ISA and Help to Buy ISA have helped hundreds of thousands of first-time buyers onto the property ladder by offering a 25% boost to savings when they buy their first home.

However, the BSA and TISA said that crucial changes needed to be made to ensure the schemes are relevant to today’s first-time buyers.

Lower the Lifetime ISA withdrawal penalty

The trade bodies are urging the Chancellor to reduce the Lifetime ISA withdrawal penalty. Currently, if a Lifetime ISA saver purchases a home above the property price limit, or needs to access the savings for another purpose, they may pay a penalty withdrawal fee of 25%.

This means they forfeit the Government bonus and a portion of their savings as well.

The BSA and TISA say lowering the withdrawal fee to 20% would allow savers to keep all their own savings while still forfeiting the Government bonus.

As an example, for someone who has saved £4,000 per year for five years in a Lifetime ISA, the penalty for using their savings towards a house above the threshold would be all the Government bonus of £5,000 and an extra £1,250 of their own savings.

Update and annually review Lifetime ISA and Help to Buy ISA property price thresholds

Lifetime ISA and Help to Buy ISA property price thresholds differ, which the trade bodies say is “confusing” and “unfair” to savers who are “subjected to much lower thresholds” than other schemes.

The property threshold for a Lifetime ISA is £450,000 across the nation, whereas for a Help to Buy ISA, it is £250,000 outside London and £450,000 inside London.

The BSA and TISA said that “it makes no sense” that a lower threshold is applied outside of London.

They added that, despite a 30% increase in house prices since Lifetime ISAs were brought out, the thresholds have remained unchanged, which is preventing some first-time buyers from buying a home within the price limits.

The trade bodies said that equalising the thresholds in the two schemes, upping it to £550,00 across all regions and committing to review them on an annual basis would ensure that both schemes “remain relevant” to first-time buyers.

Changes should be made in upcoming Budget

Robin Fieth, chief executive of the BSA, said: “The Budget on 6 March is a great opportunity for the Chancellor to make small changes that would have a big impact for would-be first-time homebuyers.

“The change to the withdrawal penalty that we are calling for was introduced on a temporary basis during the Covid pandemic and provided much-needed support to consumers in that difficult time. That shows it can be done. I would urge the Chancellor to reintroduce this on a permanent basis, ensuring the spirit of these savings schemes – which is to encourage young people to start saving to buy their first home – remains intact.”

Carol Knight, chief executive officer at TISA, said: “The current Lifetime ISA framework needs to better serve savers. Our recommendations seek to address the limitations and complexities within the system, fostering an environment where investing and the possibility of owning your own home is more accessible for all.

“Helping more people to start their financial journey in life with effective support through the Lifetime ISA is a huge opportunity for the Chancellor. Not only can implementing these reforms help more people make use of this scheme when looking to get on the property ladder, but by making Lifetime ISAs more flexible and attractive, we can also empower individuals to build robust retirement portfolios, enhancing their financial security in later life.”

Related: Strongest hint yet from the Chancellor over Lifetime ISA penalty reform