UK’s Jeremy Hunt to court first-time buyers with lifetime ISA shake-up

LONDON — Jeremy Hunt is on a mission to woo first-time homebuyers. 

The U.K. chancellor is considering shaking up the Lifetime Individual Savings Account, or LISA, in a ploy to get more people on the property ladder — and to win more youth votes.

In a plan welcomed by consumer champions, Hunt will use the U.K. spring budget on March 6 to bring the saving product up-to-date with soaring house prices — a political move aimed directly at younger voters, who have become increasingly disillusioned with rising costs.

The move was first reported by POLITICO’s Financial Services U.K. newsletter. It has already been welcomed by consumer champions as fixing “the current dire system.”

Two industry figures involved in the discussions told POLITICO that Hunt is considering increasing the property limit on which the savings product can be used, and reducing a penalty charge for individuals who choose to take their money out of the account without putting it towards a property.

The LISA is designed to help people aged between 18 to 39 buy their first home or to save for retirement. It has a £4,000 tax-free contribution limit each year.

Martin Lewis, founder of MoneySavingExpert, who has been campaigning for an overhaul to the LISA since last year, told POLITICO he is “delighted” the government is considering the move. 

Hunt is set to make the exact changes called for by Lewis, including reducing the penalty charge from 25 to 20 percent and lifting the property limit from £450,000 to £500,000. The savings product was introduced in 2017 but has not been amended since then, while U.K. property prices increased on average 33 percent between 2017 and end-2023.

Lewis had previously described the product as a “dead duck” for exactly that reason. For the many first-time buyers purchasing properties above the £450,000 limit, the LISA became unusable and the 25 percent withdrawal charge meaning that savers actually lost money.

Although the main draw to investing in a LISA — a government bonus of up to £1,000 for an individual saving £4,000 annually — the 25 percent withdrawal charge meant that a saver would lose some of their own original investment.

For example, a first-time buyer looking to use their LISA for a home worth £451,000 could withdraw their £4,000 savings, plus the £1,000 bonus from the government, but end up with £3,750 as a result of the 25 percent penalty applied to the total £5,000 — £250 less than was saved in the first place.

The result has been that savers have been forced to take the hit to access their money — netting the government a cool £47.2 million in penalty fees in the 2022/2023 tax year alone. Between 2019 and 2023 the Treasury earned £101 million on the penalty fees.

“The LISA was designed to help first-time home buyers, and with rising house prices and a low commensurate rise in the £450,000 ceiling. It has not helped first-time buyers and instead, it has actively penalized them by fining them to use their own money and the government has been raking that [penalties] in,” Lewis told POLITICO. 

The LISA was created in order to help first-time home buyers | Justin Tallis/AFP via Getty Images)

“For people buying a house, there should be no penalty. I am also pleased to see the potential of a price limit rise. I also hope the chancellor considers index linking the LISA limit with house prices. We have been campaigning about it for 18 months, and questioned him on my television show and he said he would look into it. It is nice to know he is,” Lewis added.

Steve Webb, a former pensions minister and now partner at consultants LCP, said: “Scrapping the penalty for taking money out of a LISA would be a very welcome move.  Most people who take out a LISA do so with the intention of buying a property but plans can change. Someone may have an urgent need for money now or may change their plans around buying a property.”

“There is no reason why such people should be penalized beyond returning the government bonus.  This change will encourage more people to take out a LISA without the fear of facing a penalty or locking their money up until they are sixty if things don’t turn out as planned.”

Elsewhere, members of the industry urged the chancellor to make the changes at the House of Commons despatch box on March 6. 

“The change would certainly make the LISA more attractive, especially if coupled with an increase to the limit on the value of homes bought,” Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said. 

“This limit has not been revised since LISAs were launched and house price growth has surged. This means that many people, particularly in the South-East would find it difficult to find a first home within this limit and so an increase would be of huge benefit in helping people get that all-important first step on the housing ladder.”