According to research by AJ Bell, the Lifetime ISA designed to help first-time buyers get on the property ladder is in danger of pricing buyers out of the market in 62 regions.
The wealth platform is urging the government to increase the limit on the price of a property a first-time buyer can use the ISA for from the current level of £450,000, which has remained in place since inception in 2027.
AJ Bell has calculated that to keep up with the increase in house prices, the limit for the Lifetime ISA should now be £575,000. By keeping the limit at £450,000, first-time buyers are at risk of the 25% penalty imposed for withdrawing cash from their Lifetime ISA.
Current rules also mean that if someone has used the ISA to invest in stocks, the government will also pocket 25% of the portfolio’s gains. AJ Bell also suggests that the penalty for withdrawing should be reduced to 20% from 25% to match the monetary value of the bonus provided by the product.
Rules mean that if someone placed £10,000 in the product and received the bonuses but then had to withdraw the cash, they would only be left with £9,375. The system is obviously broken.
It’s abundantly clear that the government needs to rethink rules around the product. The inaction and mismanagement of the product are punishing first-time buyers. If governed appropriately, a Lifetime ISA will support the lifeblood of the UK property market.
The government needs to drastically improve the UK investment landscape and encourage young investors to use products such as the Lifetime ISA, which is an obvious place to start. What the Labour Party does with the Lifetime ISA could be considered a barometer of their competency. It’s an easy fix that will have a big impact.
“It’s vital that Chancellor Rachel Reeves increases the maximum property value that people can buy using money held in a Lifetime ISA,” says Dan Coatsworth, investment analyst at AJ Bell.
“The government has frozen allowances on all types of ISAs until 2030. If the Lifetime ISA’s terms and conditions also remain frozen for another five years, flats in places like Ealing and Merton in outer London and terraced houses further afield in locations such as Winchester and Guildford will be deemed too expensive for first-time buyers to deploy funds from a Lifetime ISA without penalty because they are forecast to exceed the £450,000 limit. Even typical first-time buyer properties in the Cotswolds, South Oxfordshire and parts of Kent are projected to be in the penalty zone over the next five years.”