How George Osborne’s ‘radical’ Isa ended in disaster for savers

20/06/2024

george osborne

When former chancellor George Osborne launched the Lifetime Isa in 2016, it was branded a revolution.

He called the Lisa “a completely new, flexible way for the next generation to save”. Paul Johnson, the director of the Institute for Fiscal Studies, then described Mr Osborne as “a genuinely radical reforming chancellor”.

The idea was to give savers a tax-free nest egg to spend either on their first home or during retirement – and the Government would even contribute to the pot.

Those aged 18 to 39 can pay up to £4,000 a year into their Lisa account – with the Government adding a 25pc top-up. Anyone savvy enough to max out their bonus stands to gain £33,000 over 30 years, plus interest.

It has proved popular. In 2022-23, there were just over a million open Lisa accounts. Some £4.3bn of savings were held in Lisas in 2021-22, the latest year for which data is available.

But seven years after people started saving, the former chancellor’s brainchild is in desperate need of fixing. Savers have been forced to pay out millions in fines simply to withdraw their own money.

A ‘dead duck’

The Lisa comes with several terms and conditions which at first glance appear reasonable, but have severely undermined its core objective – and cost savers large chunks of their own cash.

There are only three scenarios in which you can withdraw money from your Lisa without paying a penalty: if you are using the money to buy your first home, which must cost £450,000 or less; if you are at least 60 years old; or if you are terminally ill.

Otherwise, you will be charged 25pc of the amount withdrawn. This means losing the full government bonus the withdrawal amount accrued, plus 6.25pc of your original investment.

The £450,000 house price cap has remained frozen since 2017 despite soaring house prices. It has meant a rising number of savers being stung with penalties after withdrawing money from the Lisa to buy a home that breaches the limit. Martin Lewis, founder of MoneySavingExpert, previously said the cap made the Lisa a “dead duck” product.

Between April 2017 and March 2024, the average UK property jumped in value by 29.3pc. Prices paid by first-time buyers soared by 26pc over the period, but in Wales and North West England prices shot up by 42pc.

Using Lisa savings to buy property costing more than £450,000 will leave you out of pocket. For example, a first-time buyer looking to use their Lisa for a home worth £451,000 could withdraw £10,000 of savings, plus the £2,500 bonus, but end up with £9,375 as a result of the 25pc penalty – £625 less than was saved in the first place.

More than 185,000 savers have been fined a total of £127m for withdrawing their own money since the scheme was introduced, according to data obtained by a Freedom of Information request. Including lost interest, this works out at £684 per head.

Others have been priced out of the market altogether and have decided to cut their losses and withdraw their money – which would have been locked away until they turned 60. Some 88pc of account holders are yet to buy their first home with the help of Lisa savings.

The number of savers paying to access their own money is rising. The proportion of accounts making “unauthorised withdrawals” more than doubled from 2.6pc in 2018-19 to 7pc in 2022-23.

Experts are warning that thousands more could fall into the same trap as house prices continue to rise and the cap remains frozen.

The cap would now have reached £595,192 if it had risen in line with house price inflation, according to analysis by broker AJ Bell.

Tom Selby, of AJ Bell, said: “Even though house prices have dropped over the short term, they have still risen dramatically in recent years, meaning many people using a Lisa for their first home face being priced out of the product.

“Many aspiring homebuyers will have signed up to the accounts years ago, not realising that it would take so long to get on the property ladder and that they might fall foul of the property limit in the future.”

Stuart Cheetham, of lender MPowered Mortgages, said thousands of savers are being “unfairly penalised” each year for saving up to buy a home. “The Lisa withdrawal penalties are meant to ensure savers only use these accounts for what they are designed for – buying a first home or saving for retirement – but the cap on the value of property they can be used for means Lisas are increasingly unfit for purpose.”

‘Supercharging’ the Lisa

The Tories have put their mission to boost homeownership front and centre of their election campaign. However, in March, Chancellor Jeremy Hunt ignored pleas from consumer groups to reform the house price cap at the heart of Lisa rules.

Brian Byrne, of Moneybox, a Lisa provider, lobbied both Labour and the Tories to include a commitment to reforming the rules in their manifestos. He was “very disappointed” that neither party did so. “Typically, customers say cost of living pressures and unforeseen expenses cause them to withdraw their cash – the classic example is a car or boiler breaking down.

“We want an annual emergency withdrawal allowance – of say £1,000 a year – without losing any of their own funds. This would maintain the long-term savings nature of the product.

“Lisas encourage good savings habits. It’s part of the wider saving and investing culture shift we need in this country. We don’t want that to be undermined by a static house price cap.”

Labour has given little away on the prospects of Lisa reform if it enters office next month. But the consensus among experts is that reform must go beyond simply lifting the house price cap in order for Lisas to stop punishing the savers they were designed to help.

All the major Lisa rules should be relaxed in order to give prospective homeowners a chance of getting onto the property ladder, according to Mr Selby. “If the next government wants to help first-time buyers, it should consider supercharging the Lisa by reducing the government-imposed early exit charge from 25pc to 20pc, so the aim is just to return the upfront bonus.

“Increasing the minimum property price from £450,000 to take account of rising house prices would also make sense and make the product more useful to first-time buyers.

“Scrapping the Lisa age restrictions could also be appealing, making the product more accessible to self-employed workers, many of whom are not saving anywhere near enough for retirement.”

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