It’s never been harder for young people to get on the property ladder, and yet they’re not being given the tools or information they need.
The Lifetime Isa was supposed to help, but ended up leaving a lot of people confused. While some are calling for it to be scrapped altogether, I think the Lifetime Isa has a future – and a stellar one at that.
With just a few small changes, this ugly duckling become the default option for most young savers.
First, cutting the early withdrawal penalty from 25 per cent to 20 per cent would be the first easy fix, and would encourage more people to sign up.
At the moment, potential customers – who are often in their twenties – are reluctant to commit to this new Isa. And from our experience, this penalty is one of the main reasons why.
Say you put £1,000 into a Lifetime Isa, you’ll be entitled to the 25 per cent bonus, taking your savings up to £1,250.
But if you want to take your money out early, you’ll be charged a 25 per cent penalty on the whole amount. So that’s 25 per cent of £1,250. That leaves you with £937.50 which is less than you put in to begin with.
Reducing the penalty to 20 per cent would mean you only lose the bonus.
Swapping stock market exposure for housing market exposure is probably no bad thing over the long term
The reality is that things happen in life that we can’t predict. We’ve seen situations at Moneybox where people want to take their money out early for all sorts of reasons.
They may have met someone who already owns a home, chosen to invest in their education, or decided to move to another country – normal life events that are penalised under the current rules.
The second quick fix would be to either remove the £450,000 house price cap, or link it to house price inflation.
The average first home in London is £420,000, which means the average Londoner risks becoming ineligible and potentially facing the withdrawal penalty with just a small rise in prices.
If both changes were brought in now, I think uptake would fly and many of the seven million potential first time buyers in the UK would have a real helping hand in saving for their deposit.
But what if the government were to combine the Lifetime Isa, self-invested pensions, and workplace pensions under one “Super Isa” umbrella? You could then add a first home purchase as an allowable withdrawal event.
For those that take up the house buying option, swapping stock market exposure for housing market exposure is probably no bad thing over the long term. Alongside this could be a regular Isa used for easy-access shorter term goals.
Whether it's the small tweaks, or a more radical rethink, we'd love to see some changes included in the next budget.