Britons looking to get on the property ladder are set to benefit from rumoured changes to Lifetime ISA (LISA) rules which will be introduced as part of Chancellor Jeremy Hunt’s upcoming Spring Budget.
Mr Hunt is reportedly considering slashing the LISA penalty for withdrawals from 25 per cent to 20 per cent, according to Politico.
Furthermore, the Chancellor is said to be preparing to announce the property limit will be raised from £425,000 to £500,000.
These changes come amid volatility in the property market between homeowners being saddled with rising mortgage repayments and prospective homebuyers being priced out.
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The Chancellor is rumoured to be planning an overhaul of existing Lifetime ISA rules
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The Chancellor will be hoping to entice young voters to vote for the Conservative Party ahead of the expected General Election later this year.
LISAs are savings accounts which people aged between 18 to 39 years old can open (and save in them until they turn 50) and use to save up to £4,000 per tax year. They are designed to help people put money away towards their first home.
The Government then provides a 25 per cent bonus to whatever amount is saved for a deposit, up to £1,000.
However, LISAs have failed to keep pace with the changing property landscape with many young people finding themselves having to pay a 25 per cent withdrawal penalty when buying their first property, as it doesn’t qualify for the bonus. The charge aims to recover the government bonus but can mean people can lose part of the savings they deposited.
Savers can only use money from their LISA on a qualifying property which is worth up to £450,000 despite many house prices now exceeding this threshold, particularly in South-East England.
This threshold has remained frozen at this level since 2017 even though average house prices have increased by 30 per cent over since that time.
If someone under the age of 60 wants to withdraw money from their LISA for any other reason than buying a property, they will pay a 25 per cent penalty.
According to Martin Lewis, those who have saved into a LISA are being priced out the market and are being forced to pay this 25 per cent fine while withdrawing their money.
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Interest rate hikes have pushed up mortgage repayments for many GETTY The money saving expert highlighted that the 25 per cent Government bonus would increase a £20,000 LISA pot by £5,000. However, the withdrawal penalty on the same account would be £6,250 which means savers could end up with £1,250 less than what they put in.
Reacting to reports of the changes on social media, Mr Lewis said: “If true, this'd fix the current dire system whereby when people are priced out and have to buy a home above £450,000 limit the state fines them to get access to their cash.”
On X, formerly Twitter, former pensions minister Steve Webb added: “If this is true, then he is effectively abolishing the penalty for accessing your LISA money.
“You put in £80, it turns into £100 with a govt top-up, so a '20 per cent penalty' on withdrawals means you get your original £80 back in full, just hand back the bonus, but no other penalty.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, added: "Reports that the Chancellor is considering cutting the LISA early access penalty for first home buyers are welcome and if coupled with an increase in the £450,000 limit on the value of the first home to be bought would really boost people’s ability to get on the property ladder.
"The 25 per cent bonus on contributions of up to £4,000 per year acts as a huge incentive to save, but if your circumstances change you risk being levied with an early access penalty that not only takes away the government bonus but a portion of your own hard-earned savings too.
"Reducing the penalty to 20 per cent removes this issue and ensures that no-one who is trying to do the right thing in building up savings feels like they’ve been penalised for doing so.
"The change would certainly make the LISA more attractive, especially if coupled with an increase to the £450,000 limit on value of homes bought. 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."
Treasury spokesperson told GB News: “The Lifetime ISA helped over 56,000 people get on the property ladder last year and while the average price of a first-time home has increased, it remains below the cap across the vast majority of the country. As ever, we keep all aspects of the savings rules, including the LISA, under review.”
