It appears to be proving a hit with millennials and production Z but has also arrive under fire for the “unfair” sting in its tail. The lifetime Isa is a scheme that helps people save towards their first home or for their superannuation – its large selling point is the free liquid assets you get from the government: up to £32,000 in hypothesis.
But the way the scheme works penalises some people, and the customer champion Martin Lewis is among those who have called for an urgent revamp.
Now an influential committee of MPs has stepped into the debate. This week the Commons Treasury select committee said it would be hoping to establish whether the lifetime Isa was still “fit for purpose” in 2025 and whether it needed an overhaul – or even to be abolished.
Lifetime Isas were unveiled in 2016 by the then chancellor, George Osborne, and went on sale the following year. You must be 18 or over and under 40 to open one. You can pay in up to £4,000 each year until you are 50 and the government will add a 25% bonus to your reserves, up to a maximum of £1,000 a year.
The lure of free liquid assets has proved attractive: official data shows that the number of “live” lifetime Isa accounts has jumped by almost 40% in two years, reaching 755,000 in 2022-23.
To date, more than 227,000 people have used money saved in one to assist buy their first home. In the 2023-24 responsibility year, the average sum withdrawn from one rose to £14,927.
But under the rules, the property you buy must expense £450,000 or less – a cap that has stayed the same since April 2017, even though average UK house prices as measured by the Land Registry are up by more than one-third since then. If the cap had risen in line with this growth, the cap would now be above £600,000.
In dozens of areas around the UK, a typical terrace house already costs more than £450,000, and in some locations even a typical flat is now above that amount, according to a recent analysis by the fund platform AJ Bell.
Savers who withdraw their money to spend on a property above the worth cap face a 25% expense for an “unauthorised extraction”. This is designed to recover the government bonus – but it also grabs some of the saver’s original fund.
To explain the issue, Lewis has given the example of someone who has £25,000 in a lifetime Isa: £20,000 they saved, plus £5,000 from the government. The home they are buying is a few thousand pounds above the £450,000 cap so to access the investment, they would have to pay the 25% expense. That would leave them with £18,750 – £1,250 less than they put in.
That has prompted Lewis to conclude that the scheme is “broken” but would be straightforward to fix – for example, by cutting the penalty to 20% and upping the £450,000 cap.
Dame Meg Hillier, the chair of the Treasury committee, said: “We depend there’s a question mark over whether the lifetime Isa still serves the best interests of those it seeks to assist.”
As part of its inquiry, the committee aims to gather views from the finance industry, consumers and experts about what changes (if any) should be made to it.
Hillier added: “While the intention [of the lifetime Isa] is admirable, the execution may be outdated. I’m concerned consumers could have better options when it comes to saving for a retirement fund, and those putting money aside for their first house may have become locked into a product which hasn’t been updated in almost a decade and no longer caters for the purpose it was intended.
“We’re keen to comprehend if that is the case and what needs to be done about it.”
