Martin Lewis is urging Chancellor Jeremy Hunt to overhaul the Lifetime ISA (LISA) in his Autumn Statement later this month.
LISAs allow you to save up to £4,000 each tax year for your first home or retirement. In return, the Government then gives you a 25% bonus on your savings, so worth up to £1,000 each tax year. You can open a LISA if you're aged 18 to 39 and can continue saving in one until you're 50.
But savers who take out money from their LISA for anything other than their first home or retirement face a 25% withdrawal penalty which not only wipes out the bonus, but also part of their original savings. For example, if you saved £1,000, you would get a bonus from the Government of £250 - taking your LISA savings to £1,250.
If you’re hit with the withdrawal penalty, that £1,250 will be reduced to £937.50, not including any interest accrued. Martin argues this means savers are being “essentially fined - and lose their hard-saved cash” because the LISA house purchase limit has not been increased since the product launched in April 2017.
You can only use your LISA savings to purchase a property worth up to £450,000. But house prices have increased 33% on average since the LISA was created - and if you live in London, the average first-time-buyer property price was over £450,000 in 26 of its 32 boroughs.
Outside of the south east, in the past five years average first-time-buyer property prices have increased by more than 60% in some areas. This includes parts of Northern Ireland, the East and West Midlands, the north east and north west of England, Wales, and Yorkshire and the Humber.
MoneySavingExpert.com is calling for the £450,000 limit to be raised to catch up with average property price growth. Martin said: "There are rumours the Chancellor is looking to introduce new incentives to help first-time buyers. Yet the first port of call should be to fix the unfair scheme that’s currently in play. So I have formally contacted the Chancellor to urge him to make the system fairer.
"Many who have opened LISAs with government encouragement now have not only a dead duck product – where they won’t get the promised 25% boost – but one with a poisoned beak, because they’re fined to get their money out. The simple solution, which could be put into immediate effect, is for a LISA holder purchasing a first-time property for more than the maximum house price, not to be fined. So, they lose the Government’s 25% bonus, but they get their own money and interest back.
"The fine was originally put in place to stop people using LISAs for purposes other than what they were intended for. House-buyers aren’t doing that, so they shouldn’t be penalised; they should at least get back what they put in.
"A longer-term idea would be to link and backdate the LISA maximum to national or, better still, regional house price changes. So, those who open them have a legitimate expectation they will be able to use them to buy the type of house they’re considering."