The Treasury Select committee met yesterday to hear more evidence on the future of the Lifetime ISA.

The committee first met in February and had a range of speakers to discuss the viability of the product, which pays an annual bonus to savers of up to £1,000.

Much is up for discussion, including the extreme solution of abolishing the product altogether.

So what is the Government thinking on this? The committee heard evidence from MP Emma Reynolds, the economic secretary to the Treasury. 

Unfortunately, her comments didn’t provide much information on whether the LISA will be improved upon. 

Reynolds told the committee: “Any changes that could be made to improve that situation would cost money. That money would have to be found from somewhere else.”

What is the Lifetime ISA?

The Lifetime ISA or LISA is designed for people who wish to save a house deposit for their first home purchase. Alternatively, savers can use the LISA as an alternative (or addition) to a pension. 

If the saver doesn’t use it for a house deposit, then the money can’t be withdrawn until they turn 60. 

Savings of up to £4,000 a year get a 25% bonus – up to £1,000. But any withdrawal made that doesn’t include the above reasons incurs a 25% penalty. The problem here is the penalty is made on the whole amount, not just the bonus. This means in effect someone who takes money out gets less back than they put in. 

But although this aspect has drawn many critics, who have called for the penalty to be lowered to 20% – which would negate the losses – Reynolds, told the committee this was a feature not a flaw of the product. 

She told the committee: “Having rules around a penalty if you withdraw are in line with unauthorised withdrawals of a pension. The penalty of withdrawing your pension earlier is much heavier than the 25% in this case.  

“We can’t have a risk-free option of investing for the long-term, but if you take your money out, there is not a charge. We would not have that situation.”

The LISA also presents first-time buyers in areas such as London and the South East with an issue because the cap on property purchase prices is £450,000 – which prevents some savers from using the product in areas where prices are very high. 

Future of the LISA

Brian Byrnes, head of personal finance at finance app Moneybox, spoke exclusively to Mouthy Money yesterday ahead of the next committee. You can hear him explain all about the LISA – its past and its future – in the latest Mouthy Money podcast episode. 

Having given evidence at the committee hearing in February, Byrnes told the podcast that Moneybox anticipated some action from the Government on the LISA in the next Autumn Budget, later this year. 

On the back of the committee hearing, Byrnes added: “Yesterday’s Treasury Select Committee session highlighted the continued debate around the future of the LISA. While it’s encouraging to see it on the agenda, we believe now is the moment to take action. 

“Small, pragmatic changes – such as increasing the property price cap and adjusting the unauthorised withdrawal penalty – would ensure the LISA continues to deliver for first-time buyers in a fast-changing economic landscape. These aren’t radical changes – they’re common-sense updates that would make a great product even better.”

Byrnes also highlights a less-well-understood issue for the LISA – why major legacy banks don’t offer the product.

“It’s also important to clear up a common misconception: banks don’t avoid offering the LISA because of mis-selling concerns,” he says. “The reality is that administering a LISA is significantly more complex than other ISAs due to the need for real-time connections with HMRC. 

“For many larger institutions with legacy tech infrastructure, this operational burden – combined with the £4,000 annual contribution limit and lower average income of LISA savers – makes it commercially challenging. By addressing these barriers, we can unlock greater provider participation and wider access.

Ultimately Byrnes believes the LISA is a good product worth improving. 

“The Lifetime ISA (LISA) has been one of the most impactful financial products introduced in recent years, helping young people across the UK take control of their financial futures – particularly when it comes to buying their first home. Since its launch in 2017, the LISA has empowered a generation to build long-term savings habits, with the confidence that they can work towards both homeownership and long-term financial security.

“At Moneybox, we’ve seen this impact first-hand. Over the past year alone, we’ve recorded a 34% increase in customers opening a LISA. Importantly, 80% of our LISA savers earn £40k or less, demonstrating how vital this support is for those who need it most. These are hardworking individuals striving for financial independence, and the LISA is giving them the boost they need to get on the property ladder.

“While much focus is rightly placed on increasing housing supply, this remains a long-term goal. In the meantime, we urge the Government to invest in near-term, practical solutions that support aspiring first-time buyers today – helping them save, build deposits, and access affordable mortgages.

“We encourage policymakers to build on the solid foundation already in place and future-proof a product that is delivering real, measurable impact for young people nationwide.”

SAVING THE LIFETIME ISA: LISTEN TO THE FULL PODCAST EPISODE

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Mouthy Money Your Questions Answered panelist Helen Morrissey answers a reader’s question about their options when it comes to saving for a retirement if you’re self-employed.

Question: I’m 30 years old and self-employed. I don’t have a pension but would like to start saving around £250 a month for my future. Where should I start?

Answer: There are lots of personal pension providers out there so it’s worth doing your research to make sure you get the right plan for you.

Different providers will charge different fees and it’s important you understand what you are paying for and not handing over money for things you don’t need.

First let’s look at how much you can put away. You mention you want to contribute around £250 per month which is great – many self-employed people contribute on a more ad-hoc basis as their income rises and falls. If this is the case, it’s worth making sure your provider allows you to make these more irregular payments.

It’s also important that as time goes on you revisit your contributions on a regular basis and if you can increase them then this can have a huge impact on how much you end up with at retirement.

Investments are another key factor. Many people don’t feel confident making investment choices themselves and if this is the case providers will offer a default option which is designed to suit the needs of the majority of people.

However, if you have strong ideas about how and where you want to invest it is important to check your provider can meet your needs. There should be plenty of information about the options on offer on the provider’s website.

Most providers will offer you a wide range of investment options though if you want more flexibility, a self-invested personal pension (SIPP) may be a better option for you rather than a standard personal pension.

With a SIPP, you can make changes to your investments whenever you like, and you can either choose to manage your own investments or pay a financial adviser to help you.

The service you receive is also an important consideration. Pension providers will offer various tools and resources but take a look at their different offerings.

Some providers will offer a lot of tips and research into different investment options for instance which you might make a lot of use of. What kind of support does the provider offer online or over the phone is also worth considering.

Pensions are the main product people use to save for retirement but there are also other options worth considering.

The Lifetime ISA (LISA) was introduced a few years back to help people saving for retirement or for their first home. These products are available to people between the ages of 18-40.

Each year you can contribute up to £4,000 and benefit from a 25% government top up. This top up acts in a very similar way to the basic rate tax relief you get on a pension contribution so for people who don’t benefit from an employer contribution to their pension – such as the self-employed – then it’s a good option.

Added to this you can access the money from a LISA early if needed though you will be subject to a 25% penalty if you aren’t using it for house purchase or retirement. This penalty is a drawback, and we would like to see the government revisit it but if you did experience a big drop in income and needed to access the money you could do so.

This isn’t the case with a pension as you can’t access the money until you hit age 55. Another issue to consider with a LISA is that you can only contribute up until the age of 50 whereas you can contribute for longer to a pension, so this is also worth considering when weighing up your options.

Helen is a senior pensions and retirement analyst

Helen is senior pensions and retirement analyst at Hargreaves Lansdown. Prior to joining HL Helen worked at Royal London as a pensions and personal finance specialist working with the media to raise awareness of important retirement issues. Prior to this she was an award-winning journalist with 15 years’ experience of writing and editing trade publications specialising in pensions and retirement.

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My fiancée and I waited too long to put money into our Lifetime ISAs (LISAs) and now we’re stuck waiting 12 months before we can use them, thanks to a little-known rule.

The two of us only recently realised the dream of home ownership was within our grasp, if we used schemes like the LISA to save carefully. We’d also been liberated from geographic tethers – my employer is happy for me to work from anywhere I can in future.

This means we can move to a more affordable area of the country than London, namely for our purposes Devon where her family lives. And with introduction of the new 95% mortgage guarantee, it seemed our homeownership goal was tantalisingly close.

Until I realised we’d made a huge mistake with our LISA: You can only access your money to buy a house 12 months after your initial deposit.

It seems like a really simple, stupid error in hindsight. But without being aware of the rule you just wouldn’t know! Here is how our mistake unfolded.

When you set up a LISA you typically have to fund it straight away with some cash to get started.

My fiancée and I tossed around the idea of buying a house for a while, but our 100% confirmed decision to move to Devon – which triggered our new house deposit saving habit – didn’t come until quite recently. We felt under no pressure to get the LISAs open so we could fill them.

Even once we did decide to open them to take advantage of the healthy 25% bonus, in my mind the only real deadline we were working towards was the end of the tax year, which would see our £4,000 limit reset.

So we left opening them till March this year. Having already squirreled away a fair bit of money in our own savings accounts, I figured we could just pile it all in to our LISAs before the end of the tax year before the annual £4,000 bonus reset.

But, it was a huge mistake to not open the accounts and fund them straight away, as soon as we were sure we’d want to buy a house.

In the fine print of the LISA (all LISAs, not provider dependent) stipulate that you need to hold money in the account for at least 12 months before you can access it with the bonus and use it for your first home.

Otherwise, you’re forced to take the money out with a penalty that will leave you with less than you started.

In not depositing sooner, we hamstrung ourselves to waiting until March 2022 to buy our first home. It really felt like a punch in the stomach realising that.

If we had known about the rule before depositing our money, we may never have actually used the LISA. Especially considering the new 95% mortgage guarantee introduced by the government which has seen our property options increase despite the modesty of our current savings.

Push comes to shove we could have lived without the extra bonus thanks to the 95% guarantee, but now our money is locked away until next year, when the property market could conceivably have changed quite a lot.

Here is what I would suggest then. There is no minimum deposit on what you should put in your LISA. So even if you’re on the fence – or if you’re not sure when or if you’ll use it – just open a LISA and put £1 in it. If you never buy a home or use the account, you’ll be precisely £1 worse off.

If you do end up using it though, you will have cut the waiting time down on when you can access our deposit and potentially save money in what is a very fast-moving housing market.

And with the new 95% loan guarantee from the government, that could be sooner than you think.

Top tips for getting the most out of your LISA

• Put money in straight away! Don’t get caught out by the 12-month rule
• Unless you’re planning on saving for over five years, get a Cash LISA. A stocks and shares LISA could see you suffer a shortfall when you need the money if the markets are coincidentally down
• Maximise your savings if you can. You can get up to £1,000 bonus per year, but to achieve that you’ll have to contribute at least £333 per month.
• Don’t put all your house money in the LISA. You can only use these funds for the value of the house, so save extra cash for things like conveyancing and legal fees in a normal savings account instead. These costs vary, but can be anywhere up to £3,000-£4,000.

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I never really thought it would become a reality, but I have started on the path to home ownership now I’m leaving London

My girlfriend and I have been fortunate during the pandemic to have kept our jobs and to have had a warm (rented) flat in South London to call home.

We’ve been mostly comfortable with this situation, but living in London during a pandemic has forced something of a rethink. I don’t think we’re the only ones either.

One in seven Londoners wants to leave the city thanks to the pandemic, a survey conducted by the London Assembly in August 2020 found. With a population of around eight million, that’s a staggering 1.14 million people wanting out.

I’m not from London, I only moved here in 2016. I also don’t have a lot of family in the UK. This makes me pretty footloose. The GF has lived in London for longer, although she’s from Devon originally.

So, leaving London – the obvious place to go would be to head south west, where she has family and friends.

Coming to this decision together – that we would actually rather be down in that part of the world – has been something of a turning point in terms of our personal finances and goals.

Foot on the ladder

Living in London with no clear endpoint, I have always been resigned to the idea of not being a homeowner. Cobbling together a deposit for a property in the capital just seems insurmountable. It is ‘possible,’ but it would just take far too long to be a realistic choice.

Neither of us have parents who are able to give whopping great helping hands either. So, until very recently, I’ve not really thought about saving to buy a home. It’s not been worth it.

But suddenly, moving to Devon, which we’re able to do because I have a very chill, flexible employer, and the GF has a very in-demand skill as a nurse, the gamut of options has opened to us like a floodgate.

Between us we’re not quite starting from zero. The GF has around £4,000 in savings, and I have about £1,000. The reason I don’t have more is I’ve been chipping away at some old credit card debt. Until now I probably could have saved more but with no real long-term incentive, beyond topping up my pension, I haven’t really felt the need.

So, what to do to get the ball rolling?

LISA

We’re opening LISAs. That is, [L]ifetime [ISA]s. You can opt for one of two types – a stocks and shares LISA, which invests your money in financial markets, or a cash LISA, which operates more like an old-fashioned savings account with a headline interest rate.

The market for cash LISAs isn’t great at the moment, but there’s not a lot of point sticking it in the stock market when the chances are we’ll be needing the money relatively soon.

To paint a picture of how long we think it will take to save, here some official figures:

In London, the average house price is £513,997 according to the latest figures from the Office for National Statistics. In the South West, where we’re headed, that figure is £278,391. To get somewhere near a 10% deposit for that figure, we’d need about £27,000.

The LISA is actually extremely generous. You’re allowed to save up to £4,000 a year into one with the government adding in 25% of what you’ve saved up £1,000 a year. The government website explains in more detail here.

The GF and I figure if we tighten our belts properly (we haven’t really been given to thriftiness during Covid because, well, you only live once etc) we can each save around £330 a month into our LISAs – so around £3,960 each a year. Topping off the £40 difference at the end, we’ll have the full £4,000 which becomes £5,000 with the bonus.

In two years’ time, considering what we’ve started with, we should have around £26,250 before interest. Top it off a bit or wait a bit longer and we could even get to £30,000.

Which brings me to the next point…where to put the money?

As I said before, the market isn’t great at the moment for cash LISAs. The ‘best’ of the bunch is currently Moneybox which comes with a 1.11% rate on your cash, which is what we’ve chosen.

Built in is a 0.6% bonus which goes after 12 months, unfortunately, so we’ll have to see if there’s anything good on the market then and switch.

Mortgage misery

The mortgage market is a bit of a mess at the moment, especially if you’re a first-time buyer.

Before coronavirus came along you could pick up a mortgage with just a 5% deposit, although a lot of lenders pulled these deals as the economy began to tank. But now many lenders are asking for at least 20%.

Now, this is where our strategy becomes a bit of a gambit. We are essentially gambling that by 2023, some normality will have been restored, and we’ll be able to use our deposit as a 10% commitment on a loan. House prices in Devon are better than London, but if we can only get a 20% mortgage by then – £27,000 sadly (and absurdly) won’t get us very far. That being said there is evidence 10% LTV mortgages are making a comeback.

But at the moment I take the view this isn’t our fault. If in that time what we have isn’t enough, we’ll re-evaluate. The issue of deposits is one that predates the pandemic and is structural to the housing market.

If we can’t get on the ladder after that time, then it’ll be an issue with the lenders and the way the government tends to the market. Until then though, it’s up to us to prove we’re disciplined and driven to meet our savings goals.

There’s no doubt the two of us are in a fortunate position, with secure flexible employment during what is a crazy time in the world. But despite starting from a low savings base, hopefully that dream of homeownership will become a reality sooner than I ever thought possible, thanks to a bit of careful planning and a bit of parsimony.

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