Martin Lewis warned MPs over the savings vehicle (Image: Karwai Tang, WireImagevia Getty Images)
Martin Lewis has issued a warning about significant “holes” in a government scheme aimed at assisting first-time buyers to climb the property ladder.
The money expert told MPs that the Lifetime ISA had aspects that should be changed..
This tax-free savings account is available to people aged 18 to 39, allowing them to save towards retirement or purchasing their first home.
Account holders can contribute up to £4,000 annually and receive a 25% government bonus.
However, the scheme enforces stringent rules on withdrawals, permitting penalty-free access only when purchasing a first home valued at no more than £450,000 or upon reaching 60 years of age for retirement purposes.
I gave evidence to on LISAs today – a savings product 1st time homebuyers can use to get an up to £1,000/yr bonus on. Yet use it on a property over £450,000 and the state effectively fines you 6.25% of what you’ve put in, to get the cash out.This is unfair and…
— Martin Lewis (@MartinSLewis)
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First-time buyers need to watch out for the strict rules (Image: phakphum patjangkata via Getty Images)
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Any other withdrawal reasons, except in cases of terminal illness, incur a hefty 25% penalty.
Martin, a familiar face on ITV, cautioned MPs that the initiative’s “complexity” was failing to support first-time buyers effectively.
He said complex rules around the savings option were creating obstacles for prospective homeowners.
Speaking to the the Treasury Select Committee, he said: “The problem with the Lifetime ISA is the penalty for withdrawal. 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.”
Martin Lewis wants the penalty charge to be changed in some instaces (Image: andresr via Getty Images)
Martin has highlighted an issue affecting first-time homebuyers who have been using their the Lifetime ISA (LISA) only to be penalised when buying a house beyond the £450k threshold.
He said: “We have a succession of young people who are saving in the vehicle they have been encouraged by the state, who are then trying to use their savings to buy a first-time property, but due to house price inflation, that property has just tripped above the £450k level and not only do they not get the £1,000 a year bonus they were intended to get – which I understand, it is legitimate, there is a threshold – they are fined by the State effectively 6.2% of their own money to withdraw that money to get the cash out.”
Treasury figures show that in the 2023/24 tax year, people paid £1.8m in penalties to the government for accessing their LISA funds without meeting the conditions.
Martin is campaigning for a reduction of this penalty to 20% for those exceeding the house price limit.
He said: “Many people think that if you add 25% and take off 25%, you get back to where you started. You don’t; you end up with 6.2% less. When there is an off-putting thing like a penalty, that will disproportionately affect those who are less financially educated, who tend to be from lower income backgrounds.”
Martin criticised the “confusion” and “complexity” surrounding the savings product, saying if “major holes” were fixed the LISA could “work really well”.