Martin Lewis demands ‘critical’ action as Lifetime ISA savers face losing thousands

Martin Lewis has called on the government to fix a ‘growing hole’ in the Lifetime ISA (LISA) scheme.

The Money Saving Expert warns that thousands of first-time buyers are being unfairly penalised by outdated rules. He says that action is ‘critical’ and must be taken.

LISAs were first launched by the Conservative Government in 2017 to help under-40s save for a retirement or first home. You can open one at 18 and put in up to £4,000 a year. The government adds 25% on top — so essentially, it’s ‘free’ money.

Since its launch, more than one million people have opened a LISA. If you opened one in 2017, and deposited the maximum £4,000 a year, you’d already have £32,000 of your own savings. The government’s extra 25% brings you to £40,000.

But despite their popularity, Martin says the scheme is now actively discouraging people from saving. This is due to the fact that the maximum property you can buy with a LISA is £450,000 — a threshold which hasn’t budged since it launched nearly a decade ago. 

If someone then needed to withdraw their LISA money to buy a property over this cap, they’d lose the government bonus completely, and face a 6.25% penalty on their own savings.

On the maximum £40,000 saved, that’s a £2,500 penalty. This money is taken from the saver’s own contributions.

With house prices soaring, particularly in the south east of England, the Money Saving Expert says more and more people are exceeding the limit.  And when that happens, the cost is steep.

‘No first-time buyer should be penalised for accessing their LISA savings to buy their first property – as that’s what the state, and the marketing, encourages them to do,’ Lewis said.

‘It’s understandable that they don’t get the 25% bonus, but they’re effectively fined £625 for every £10,000 they’ve saved. It’s unfair, it’s unjust, and the rules need changing.’

The Money Saving Expert claimed that the current system is putting off a whole generation of hopeful savers. 

‘This flaw doesn’t just hurt those with LISAs,’ he said. ‘It puts off many young people, especially from lower-income backgrounds, who tend to be more risk-averse, from opening LISAs in the first place.’

MPS on the Treasury Committee have been investigating whether LISAs remain fit for purpose. In their new report, they argue that the dual purpose of helping savers prepare for both home ownership and retirement ‘makes it more likely consumers will choose unsuitable investment strategies’.

‘Cash LISAs may suit those saving for a first home but may not achieve the best outcome for those using it as a retirement savings product,’ the report reads.

‘As they are unable to invest in higher-risk but potentially higher-return products such as bonds and equities.’

Martin, who has highlighted the issue previously, welcomed the report’s findings. 

He said: ‘This is something we’ve banged the drum about for years. So, I’m glad it appears in the Treasury Committee report.

Martin Lewis has campaigned for a reduction in the withdrawal charge to 20%. He said: ‘I have no problem with the withdrawal penalty in its own right. I have a problem with it for first-time buyers buying a house.

‘We have a succession of young people who are saving in the vehicle they have been encouraged to save in by the state, who are then trying to use their savings to buy a first-time property, but due to house price inflation their property has just tripped above the £450,000 level.

‘Then not only do they not get the £1,000 a year bonus they were intended to get, which I understand is legitimate as a threshold, but they are fined by the state effectively 6.25% of their own money in order to withdraw that money to get the cash out.’

Martin describes the removal of the charge as a ‘small fix’, that would have very little cost to the state. He adds that it would encourage many young feel to feel confident about LISAs and that it’s ‘critical it’s dressed’.

Do you have a story to share?

Get in touch by emailing MetroLifestyleTeam@Metro.co.uk.