Should you get a Lifetime ISA? Here are two key issues to consider
A lot has been reported on possible changes to ISAs in future recently.
For the Savings Guide this week, Anna Bowes, savings expert from The Private Office, makes sense of the controversy surrounding Lifetime ISAs.
ISAs are all over the news at the moment, as Chancellor Rachel Reeves is expected to launch a broad review.
One aspect that could benefit from an overhaul is the Lifetime ISA (LISA).
The idea of the LISA is great - to help people buy their first home or save for retirement, offering a tempting 25% government bonus on every deposit.
But as with many financial products, the devil is in the detail, and a recent report from the Treasury Select Committee has highlighted how complicated and at times unfair the LISA can be.
If you're between 18 and 39, you can open a LISA and put in up to £4,000 a year until the day before you turn 50. The government will top up any deposit with a 25% bonus.
That's up to £1,000 extra each year, far more generous than most other savings schemes. If you're saving to buy your first home or for later life, it can make a real difference.
A major concern, however, is how inflexible the LISA can be. If you need to access before the age of 60, for anything other than buying your first home, you'll be hit with a 25% penalty.
That might sound like you're just giving back the bonus - but you're actually losing part of your own savings too. It works out as an effective 6.25% loss on the money you put in, which is a nasty surprise if you suddenly need to dip into your account.
Then there's the issue of the property price cap. The £450,000 limit was set in 2017 and hasn't moved since.
In many parts of the country, particularly London and the South East, this doesn't stretch far enough, which means buyers risk being penalised for using their own LISA savings if the property comes in even a few pounds over the cap.
That's not just frustrating, it feels unjust, especially in a market in which house prices have continued to rise while the cap has not.
According to recent figures, more people are withdrawing cash early than using it to buy a home. In the previous tax year, almost 100,000 people were hit with the withdrawal charge, while fewer than 57,000 used it to step onto the property ladder.
None of this is to say the Lifetime ISA is a bad idea; it's just not as simple or user-friendly as it ought to be.
Used correctly, it can be an excellent tool. But too many savers are falling foul of the rules.
The government now has an opportunity to fix the flaws, and savers deserve a product that rewards careful planning - not one that catches them out.
Until then, anyone considering a LISA should tread carefully.
It's a good product, but only if you're sure you won't need that money unexpectedly.
As always, the key is knowing the rules before you sign on the dotted line.
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