Are LISAs fit for purpose?

Independent

02-03-2025

Given sky-high rent prices eating into people's ability to save a deposit to buy a house, every penny helps.
The average private rent in Great Britain was £1,332 per month in January 2025 – 8.7 per cent higher than 12 months previously, according to the Office of National Statistics (ONS).
The LISA enables people to save up to £4,000 per year and receive a 25 per cent government top-up. Save the full £4,000 and you'll receive a £1,000 boost.
Except, the savings product has flaws. Not least that you can only use it to buy a property priced up to £450,000. This is a problem considering average house prices in London (£549,000) and the South East of England (£384,000), according to ONS data.
Withdrawal penalty
Tied into that is the withdrawal penalty. If you withdraw money for anything other than buying your first home or retirement – which is the other use of Lifetime ISAs – you'll face a 25 per cent penalty. And this means savers lose some of their own money, too.
For example, if you've saved £4,000 into your LISA, the 25 per cent government bonus brings your total savings to £5,000. If you need to withdraw your savings to buy a home but the property costs more than £450,000, you'll have to pay the 25 per cent penalty. £5,000 x 25 per cent = £1,250 penalty. This leaves you with £3,750. That's £250 less than the original £4,000 you've saved. Is that fair? I think not.
Age limit
Then there's the age limit. You can open a LISA between the ages of 18 and 39. I've spoken to several fortysomethings, wanting to get on the property ladder, who, upon finding out about the LISA, are gutted they've missed the boat and can't open one.
Given the rising age of first-time buyers, which currently stands at 34 according to government figures, being able to open a LISA beyond the age of 40 seems fair to me.
For these reasons and more, LISAs are under review. On Wednesday, members of the Treasury Select Committee heard from a range of industry experts, LISA providers and consumer champions including Martin Lewis and family finance expert and founder of Hoops Finance, Funmi Olufunwa.
LISA awareness
Ms Olufunwa says: 'The LISA has two main objectives – to help people buy their first home or to save for retirement. The vast majority of people use it to buy a home and from that point of view, it's a workable product. But for a minority of people it doesn't work because of the £450,000 property price cap.
'This can make people wary of taking out a LISA, as they don't want to run the risk of losing not just the government bonus but some of their own money too.
'Most people save a long time to buy a home and if house prices rise over that time, then you risk being penalised due to circumstances beyond your control. That's unfair.'
There's also a lack of awareness about the existence of the LISA, which has been around since 2017.
Ms Olufunwa says: 'I was surprised how many people haven't heard of it. And I think this is for a number of reasons. First, none of the main high-street providers offer a Lifetime ISA, so it's not the typical product you see on a savings page. Someone needs to tell you about it.
'Secondly, the name of it isn't very helpful. People knew what the Help to Buy ISA did, similarly, the Help to Save scheme is well-named. With the Lifetime ISA or LISA however, people don't readily think 'that's going to help me with money towards buying a home'.'
'My cousin told me about it'
I spoke to one prospective buyer who found out about the LISA though a conversation with her cousin and says more awareness is needed.
Michelle, 35, is a singer and lives in Watford, Hertfordshire. She says: 'I opened my Lifetime ISA in 2023. My cousin of mine who is good with her finances, so across things like this, told me about it. She was saying that she'd got her daughter to open one which is how it came up in conversation. That how I first found out about it.
'I do want to buy a home so I thought let me take advantage of it, given that you get a 25 per cent government bonus.
Savings boost
'I've since told people about the Lifetime ISA and more often than not they've been unaware of it, even those who are saving to buy, so I do think the advertising could be better. I also don't think people realise you're getting free money to boost your savings.
'I've maxed out my LISA for two years now. With the government bonus and interest, my balance stands at £10,601. I actually like the fact that you can't touch the money without penalty. I'm loathe to lose any of my own money. Of course, I do think it's unfair for buyers in more expensive areas face who could lose their own money.
'Watford is expensive but not as pricey as London. I'll be buying by myself and I'm looking at two-bed flats around £240,000 to £250,000. I want to save a 10 per cent deposit. I'm saving into a Cash ISA too, where I match what I save in my Lifetime ISA – just without the government bonus, of course. This means I'm on track to buy in the next two years.'
The Treasury Select Committee will report back on its LISA review in due course – no date has been set. But in the meantime, let's spread the word.
Talia Loderick is a Money Coach. Talia helps people understand and take control of their behaviour with money so they can stop stressing about money and have enough to live well – now and in future. Visit: talialoderick.co.uk.