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Boris’ pledge to exclude Lifetime ISA savings from Universal Credit rules shelved

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07/10/2022
The government is no longer looking at ways to exclude Help to Buy ISA or Lifetime ISA savings under Universal Credit eligibility rules after the former Prime Minister floated the idea back in the summer.

In a blow to Brits who have opened these government saving schemes to help them get on the property ladder – but who are now struggling amid the cost-of-living crisis – the Department for Work and Pensions (DWP) confirmed to YourMoney.com that the current thresholds for Universal Credit (UC) remain.

As such, no exception will be made for Help to Buy or Lifetime ISA account holders.

This is a pivot from former Prime Minister Boris Johnson’s intention to explore a way in which money in a Help to Buy or Lifetime ISA could be discounted from applications for the means-tested benefit.

In his housing speech in June 2022, Johnson said: “To remove another [barrier] we’re going to explore discounting Lifetime and Help to Buy ISA savings from Universal Credit eligibility rules.

“Not letting anyone claim benefits while sitting on vast savings pots that they could be drawing on…That’s not the people we’re targeting here.

“But making it easier for hard-working people to put away a little each month until they have enough for a deposit on their first home.”

‘It is utterly heartbreaking’

Catherine is a financial adviser who lives with her husband and young son in rented accommodation.

She saved cash for years which was then put into a LISA (they each opened one) to help the couple buy their own home. Unfortunately, the effects of the Covid pandemic and now the cost-of living crisis means they’ve had to dip into one and were hoping Johnson’s pledge would be seen through to the end.

Catherine said: “Under the current rules, we are not eligible for UC despite us both having very low incomes as a result of the Covid pandemic and other factors. We are both taking steps to increase our earnings but this is not happening quickly enough to keep up with the current cost-of-living crisis. Being a financial adviser myself, I never expected to find myself in this position. We now source secondhand clothes for our son in order to afford rent, food and utilities. We are really struggling.”

The mother in her forties added she was “extremely savvy” and chose to save money rather than spend it on clothes, gadgets and nights out – “money which is now sat in two Lifetime ISAs”.

She said: “Under the current set up, the government is expecting my husband and I to wave goodbye to any hopes of home ownership and instead use these savings to pay our rent, electricity bill etc. It is utterly heart-breaking. We’ve already taken the penalty hit by withdrawing one amount and, without access to UC, will have to continue to do so. Very quickly there will be nothing left. This is money I’ve saved since the age of 18, so for well over twenty years.”

Record Universal Credit claimants during pandemic

The move by the government to consider discounting Help to Buy and Lifetime ISA (LISA) cash from UC claims came after a record number of people claimed UC for the first time during the Covid pandemic. However, many weren’t eligible or saw the amount reduced because they saved money in a Help to Buy ISA or LISA.

DWP figures revealed there were 1.8 million people claiming the benefit in March 2019, three million in March 2020 (the onset of the pandemic), and a peak 5.97 million in March 2021. According to the latest statistics for August 2022, 5.7 million are in receipt of UC.

As it’s a means-tested benefit, anyone with capital above £16,000 usually isn’t eligible to claim. For those with capital between £6,000 and £16,000, the UC is reduced by £4.35 per month for each £250 or part of £250 capital above £6,000. Capital below £6,000 is disregarded.

For many already committed to saving money in the government’s Help to Buy ISA or LISA, it meant they accessed this cash first before being eligible for state help.

While anyone accessing Help to Buy ISA cash early sacrifices just the government bonus, for LISA holders, the penalty is more severe. Accessing LISA cash for a reason other than buying a first home (or reaching age 60 if the LISA is used for retirement savings) carries a 25% penalty.

This is on the total amount, not just the government’s 25% bonus which means the penalty takes out a bigger chunk from the holder’s overall deposit. See YourMoney.com’s Help to Buy and Lifetime ISA guide for more information on the schemes.

Temporary cut to the Lifetime ISA penalty charge

In recognition of this, the government temporarily cut the LISA penalty to 20% in March 2020 to help people suffering financially due to the pandemic and who may have needed to fall back on these savings.

It was restored to 25% in April 2021 and now, given the cost-of-living crisis, it means many may once more be forced to dip into this ISA cash to keep afloat.

Johnson’s housing speech gave prospective homeowners a glimmer of hope that they wouldn’t need to raid these long-term savings to ride out the short-term affordability pressures.

But with the DWP confirming it is maintaining the thresholds for all savings products, including ISA money in these government schemes, for those who have saved for years in the hope of becoming a homeowner, the soaring house prices, inflation and the cost-of-living crisis mean this dream is becoming a distant reality.

It is understood people with LISA and Help to Buy ISAs will not lose the government contribution if they claim UC as only the saver’s available capital is taken into account. This means the 25% government contribution to the LISA would not be treated as capital until the holder reaches 60 years of age when they can access the ISA without any penalties.

As an example, a saver with £16,000 in their LISA would expect a £4,000 government bonus, taking the total to £20,000. However, in this scenario, they will be eligible for UC as just the £16,000, not the government bonus is factored in. Once this total sum is available to the saver, say after the age of 60, then DWP will treat the full £20,000 as part of UC calculations, meaning the holder would not be eligible.

The government is minded to keep all aspects of tax policy under review and consider evidence and representations it receives carefully as part of that process. It is not expected to cut the LISA penalty back down to 20%.

‘Dreams of home ownership slip back further’

Dan Wilson Craw, deputy director of Generation Rent, said: “If the country falls into recession, a lot of people who have their savings tied up in these government schemes will lose their jobs. If they have to withdraw savings before getting state help they will see their dreams of home ownership slip back even further.

“Of course, most private renters have no savings at all so have nothing to fall back on in hard times. A big concern is that rents have risen dramatically in the past year but benefits have not kept pace. During a recession we could see more renters getting into arrears and facing eviction and homelessness – unless the government steps in to shore up support.”

Paula Higgins, chief executive of the property advice website, HomeOwners Alliance, said Lifetime ISAs “aren’t perfect by any means”.

“But in the fast depleting suite of help for people seriously saving for their first home, the 25% bonus you can earn makes them a no-brainer. But we do warn that one major downside is that it’s not easy to access your money tied up in a LISA account – the 25% withdrawal payment penalty is expensive and can wipe out any benefit,” she said.

Higgins added: “In these chaotic political times, it’s worth remembering there is no guarantee that future governments will raise the [property value] threshold or continue to offer the bonus payments. So it’s always best to have a plan B.”

‘Appropriate to take all savings into account’

A DWP spokesperson said: “It is appropriate that means-tested benefits, including Universal Credit, take all forms of savings into account. This should include investments where the government provides a contribution to encourage saving: the Lifetime ISA and Help to Buy ISA.

“The £16,000 upper capital limit strikes a balance between protecting less well-off people and protecting the taxpayer, whilst at the same time recognising the conscientious efforts of people who have built up capital. This limit ensures that the help which comes from taxpayers, many of whom are themselves on low incomes and have limited capital, is directed to people who need it most.”

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