AJ Bell has warned that first-time buyers using a Lifetime ISA to purchase a home face growing challenges as property prices exceed the £450,000 threshold for penalty-free withdrawals. The investment platform is calling on the government to increase the limit annually in line with house price inflation and reduce the exit penalty from 25% to 20%.
According to AJ Bell’s analysis, if the £450,000 cap had increased with average UK house price growth since Lifetime ISAs were introduced in 2017, it would now sit at £575,550. The firm says that without changes, an increasing number of buyers could be forced to pay penalties to access their savings, reducing their deposits and making homeownership less attainable.
Dan Coatsworth, investment analyst at AJ Bell, said: “It’s vital that Chancellor Rachel Reeves increases the maximum property value that people can buy using money held in a Lifetime ISA.
“The limit has been kept at £450,000 since Lifetime ISAs were launched in April 2017 yet the average UK property price has increased by 27.9% since that date. One solution is to increase the maximum property value in line with annual house price inflation.
“The upper limit for properties bought using money from a Lifetime ISA without penalty would now be £575,550 had it been uprated by the 27.9% increase in average UK property prices since the tax-efficient account type was launched just under eight years ago.
“Tweaking the maximum property value limit for penalty-free withdrawals from a Lifetime ISA by a small amount each year would make a massive difference to so many individuals.”
AJ Bell’s research highlights the impact on buyers in areas where property prices have risen significantly. Coatsworth added: “Many aspiring homeowners who’ve worked hard to save for a deposit now face the prospect of properties in their desired location exceeding the upper limit in a Lifetime ISA. They must either buy somewhere else with lower property prices or pay the 25% penalty to withdraw their money from the Lifetime ISA.
“Taking a hit via the penalty charge could see an aspiring homeowner left with a smaller deposit than they would have otherwise had, meaning they may have to take out a bigger mortgage which could also come with a higher rate of borrowing.
“Flats and terraced houses in more parts of London will soon exceed the £450,000 limit, as will terraced houses in Hampshire, Hertfordshire and Surrey, according to analysis by AJ Bell. That’s particularly bad for anyone who commutes into the capital as they might have to lay down their roots with a home much further out.”
AJ Bell is also calling for a reduction in the Lifetime ISA exit penalty to 20%, arguing that the current 25% charge unfairly penalises savers. Coatsworth said: “The government wants to help people achieve their dream of home ownership but the Lifetime ISA in its current form can be more hindrance than help for many individuals. Someone set on a particular location might have no choice but to pay the Lifetime ISA exit penalty if the property is worth more than £450,000. The 25% charge isn’t simply giving the government back its bonus – it’s also 6.25% of the savers’ own money.
“For example, £8,000 worth of contributions into a Lifetime ISA would be topped up by a further £2,000 bonus money from the government. A 25% exit penalty on that £10,000 sum would equate to £2,500 – effectively giving back the £2,000 government bonus and losing a further £500 (6.25% of £8,000 personal contribution). In this situation, the saver would be penalised for saving which could affect their attitude towards putting money away in the future.
“Rachel Reeves should seriously consider reducing the exit penalty to 20% so that savers only give up the government bonus if their withdrawal circumstances trigger the charge. The government implemented a temporary reduction in the charge during the pandemic to avoid penalising anyone forced to take their money early when the economy ground to a halt. It should now make that measure permanent to avoid putting people off using a Lifetime ISA.”
AJ Bell’s analysis, based on Land Registry data and Office for Budget Responsibility (OBR) house price forecasts, suggests that by 2029, an additional 23 UK regions could become unaffordable for first-time buyers using a Lifetime ISA, bringing the total number of affected areas to 62.
