Is the Lifetime ISA really the answer to your property ladder problems?
After long anticipation, the Lifetime ISA (‘LISA’) will finally be making an appearance on 6 April 2017, with only certain people eligible to reap the benefits. The LISA is an individual savings account available to those aged between 18 and 40. Chancellor, George Osborne, first introduced the LISA in his 2016 Budget, offering a solution for those struggling, trying, and failing to climb the unforgiving property ladder. It is also designed to tackle the other large milestone in life through providing a tax-free pecuniary pot upon turning 60. Given that Local Government Secretary, Sajid Javid, has confirmed that we are amidst a ‘broken’ housing market, we will be discussing the former.
The LISA will ensure that the Government pays a bonus of up to £1,000.00 per year on investments made. However, the catch is that savers may only pay a maximum of £4,000.00 into their account annually. Towards the end of the first year, there will be a 25% bonus. From the year 2018/19, this bonus will be monthly. Somebody aged 18 can potentially earn up to £32,000.00 in a ‘free’ Government hand-out. This is provided that they gradually pay £128,000.00 into their account until they turn 50, which is the cut-off point for paying into the LISA.
As well as being within the necessary age range, this must be your first residential purchase. You will not qualify for the LISA if you have owned a property before, including acquirement through inheritance. This is regardless of whether the property is in the UK or not.
It is also worth noting that the purchase price is capped at £450,000.00, whether you live in or outside London. This is unlike the Help-to-Buy ISA (‘HTB Isa’) which limits the purchase price to £250,000.00 if the property is outside London. This blanket limitation could still prove to be a challenge if, for example, the cost of houses continue to escalate. It would appear that the purchase price restriction does not take the future rise and fall of the property market into consideration. Further, it remains to be seen whether the cap will be revised and/or adjusted accordingly in future.
Withdrawing money from your LISA is not without its shortcomings and incurs a 25% exit fee (except in the year 2017/18). The only exceptions are where you are buying your first home; are above 60 years of age; or have a terminal illness. Arguably, this charge may be deemed punitive; particularly if a saver happens to require urgent access to their monies for reasons other than those stipulated. Given the stringent consequence, the Financial Conduct Authority has stressed the importance of investors being forewarned.
To put the exit fee into perspective, we can look at a hypothetical situation. In this scenario, a keen teen is fortunate enough to invest £4,000.00 in their LISA and receive a 25% boost from the Government. Their total savings would now be £5,000.00. Due to unforeseen circumstances or perhaps a change of direction in their life, they need to withdraw from their pot of money earlier than expected. Unfortunately though, this entails a hefty penalty of 25%. They would be penalised by £1,250.00, only to discover that their savings amount to £3,750.00 – a shocking 6.5% less than their initial investment. It begs the question, is their LISA truly worth it?
Evidently, the scheme is bountiful in a situation where you do not need to prematurely access your money and it can prove generous in other ways too. One example of this is where you and your partner/spouse have both opened a LISA each and are looking to buy a house together (both as first-time buyers). Provided that the house costs no more than £450,000.00, you can theoretically benefit from two bonuses.
Whether purchasing alone or with your significant other, the money is paid directly to the Conveyancer/Solicitor handling your transaction. Unlike the HTB ISA, the money stored in the LISA may be utilised for the deposit at Exchange of Contracts (‘Exchange’). This is the point at which the Buyer(s) and Seller(s) become legally bound by the Contract they have afore signed. Do be advised that these savings may only be used on Exchange or Completion if your LISA has been open for at least a year.
Scepticism has risen since the unveiling of the LISA. Tom McPhail, Head of Pensions Research, has warned that, ‘stoking the demand side of the equation isn’t going to fix the problem – it’s going to accelerate the problem’ and insists that the Government should facilitate ‘more house construction’ instead. This echoes the beliefs of Sajid Javid who advises that, ‘The only way to halt the decline in affordability and help more people onto the housing ladder is to build more homes.’
When simplified, the LISA appears to be a lot like free money, particularly where people are able to and can afford to save. If you cannot afford to save, then surely this lifeline being offered by George Osborne is not actually a lifeline after all. One may argue that climbing the property ladder will not become any easier even if the LISA is there to assist. Therefore, it is logical to deduce that the imbalance between the privileged and those from less fortunate backgrounds is as prevalent as ever; thus the introduction of the LISA only serves to perpetuate this. For that reason, perhaps it would be beneficial to now address the major issue of sustained property price inflation so that a significant chunk of one’s life is not spent merely saving for a first home.
Written by Harj Mann, Trainee Solicitor