Editor: The Lifetime ISA Has Come at a Cost – Guilt

I asked several people with Lifetime ISAs to describe their experiences. None had serious criticisms, but one in particular felt morally torn over his experience

Ollie Smith 31 March, 2023 | 9:51AM
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George Osborne

The result of political expediency and a short-lived Treasury-led flirtation with ISA products, the Lifetime ISA sparked intense debate when it was announced at the 2016 Budget.

Was it sensible to add another ISA to the array of ISA products already available? Would a product that could be used to save for retirement compromise the government’s auto-enrolment messaging? And how comfortably would it roll into the since-discontinued Help to Buy ISA?

For users of the product, however, the Lifetime ISA has been useful. I’ve spoken to five people with experience of using it, and three conclusions are immediately obvious.

Despite then-chancellor George Osborne’s 2016 claims that the policy would enable a new generation of savers to flexibly prepare for both home ownership and retirement, not a single person who responded to my request for information had used the product for the latter. Each interviewee also spoke of the Lifetime ISA in largely good – and sometimes overwhelmingly positive terms – noting a process that was relatively smooth. Finally, all of them were middle-class.

How it Works

Launched in April 2017, the Lifetime ISA offers anyone under the age of 40 the chance to save up to £4,000 each year in either a stocks and shares or cash account. For every £4 saved, the government puts in £1. If you put in £4,000, the government will throw in an extra grand. The incentive is available until age 50, and the limit of £4,000 counts towards the overall ISA limit, which is £20,000 for the 2022-2023 tax year.

When it comes to withdrawing the money, savers can access their cash if they are either buying their first home, aged 60 or over, or terminally ill with less than 12 months to live. Withdrawing for any other reason triggers a withdrawal charge of 25%. When it comes buying your first property, monies can be withdrawn provided the property costs £450,000 or less, is purchased with a mortgage at least 12 months after the first payment into the account, and a conveyancing solicitor is working on the purchase with you. The same 25% charge will be triggered if those approaching retirement withdraw their money or transfer their Lifetime ISA funds to another type of ISA prior to age 60.

Reaping The Benefits

David Lane took out a Cash ISA with MoneyBox in Summer 2020. He opted for the cash option because he knew he wanted to withdraw his funds within 18 months to two years.

"I used the Lifetime ISA to buy my first home (outside London) in December 2021. I’d managed to put the full £4,000 for the two tax years in during that period, giving me a £2,000 return on my £8,000 investment," he explains.

"Personally I think it’s been a great product. A guaranteed 25% return is a bit of a no brainer, and now interest rates are back you can get a reasonable growth on it too. The interest I generated on my account just about paid the extra fee that conveyancers charge to administer using a Lifetime ISA as part of the product!"

Adrienne used the scheme to buy her first property with her partner in 2020, and says she would recommend it to young people thinking about life after university.

"I used the Lifetime ISA to buy my first property with my partner in 2020. We found this product very helpful because our house price was over the £250,000 that the Help to Buy ISA allowed," she says.

"The government bonus of 25% was very helpful and turned our 12k deposit into a 15k deposit. We made the rest up through the Help to Buy Scheme which allowed us to have a very affordable mortgage.

"If I was a young person going to university or not in a position to buy in the next five years, I would open one and save my deposit while keeping a relatively low risk investment strategy."

And then there’s Lizzie, who used a cash Lifetime ISA to purchase her first home. She gave Moneybox a glowing review, though she said there was still a shortage of providers. That and the purchase price limit were the only negatives, in her view.

"I can’t really fault my experience of using it; the provider I went with (Moneybox) was extremely easy to set up and manage, being solely app-based," she said.

"The process of transferring the money to my solicitor for the purchase was also straightforward and easy. Again, much of this because of Moneybox. In terms of negatives, there aren’t many providers to choose from. The house cost limit is also a problem I’ve heard friends raise, particularly as it hasn’t moved much with property prices. £450,000 doesn’t go very far in London. People are also very wary of the withdrawal fees. [But] I found this a positive as it prevented me using savings on anything else!"

Moral Quandary

Sounds pretty good in the circumstances, right? Politicians are often accused of short-termism, but it seems that, despite its controversial start, the Lifetime ISA has at least found its audience.

There is, however, one snag. Some customers feel pretty guilty. Perhaps this was inevitable given they are the same millennials and Gen-Z savers who eat vegan, are climate conscious, and came of age during austerity. For some, the Lifetime ISA has been not only a godsend, but a rude awakening in the sharp end of capitalism: that someone has to lose in order for them to win.

Michael used a Lifetime ISA to buy his first flat, and says he put in “as much money as possible” to get support from the government. He says he is torn about the effect of the policy.

"Well, I benefited from it so it would be hard to criticise it, and yes, I was definitely grateful for the help,” he says. “But from an ethical standpoint, I’m concerned about the effect of such measures on inflating property prices at a time when we have a severe housing shortage and the government seems to focus disproportionately on increasing demand rather than [addressing] the lack of supply."

The accusation is that such policies serve to inflate demand, which merely pushes prices up further. And then there is the problem of spending government money on people who would probably be saving anyway.  In a report in January this year the Resolution Foundation said just that.

"Close to half (47%) of the £670 million of government support is estimated to be going to the richest fifth of households," it said.

"While intended to encourage more people to save, all of these policies’ main impact is to provide support to many people who were likely to be saving money anyway."

On the supply and demand question, Lizzie sees the point, but doesn’t think the Lifetime ISA is the primary culprit. "I’d imagine there are other more significant impacts on property prices than this, [like the issue of] multiple homes and buy-to-let, and the lack of houses being built," she says.

"As a first-time buyer in a world where it’s now so difficult to get on the housing ladder compared to previous generations, I guess I feel happy to take any help I can get. If the government offers me a scheme, I’ll use it. And I’d expect it to have fully understood and analysed its impact."

And that it did. Buried deep in the original documents for the 2016 Budget, the Office for Budget responsibility confirmed what many have argued since. Demand would only inflate prices.

"This [measure] is more likely than not to lead to higher demand for the relatively fixed supply of housing in the UK, and so to higher prices," it said.

"We have therefore added 0.3 per cent to the level of house prices by the end of the forecast, although the effect of this policy is highly uncertain."

So there you go. Not exactly a smoking gun, but certainly a loaded pistol. You could forgiven for thinking that George Osborne (pictured above in 2016) wasn't too bothered about the effect at the time, given the OBR's assessment. 

A Life Short-Lived?

There was resistance to the Lifetime ISA from the get-go, and it’s not letting up. In 2018, the Treasury Select Committee said it should go just one year after launch, and at least one Tory MP I spoke to that year thought it should be scrapped.

More recently, consumer investment platform Interactive Investor said in March that it should be phased out in favour of a simpler three-tier ISA system featuring only "equity", "cash" and "Junior ISA" products. The complexity-simplicity merry-go-round spins again.

For the most part, it’s clear the Lifetime ISA has made an impact. Those who feel guilty about participating in the scheme do so with an awareness of its obvious shortcomings.

For others, the housing market is not their problem to fix. The only problem is that the government isn’t sure that it's their responsibility either. And that comes as little consolation to those priced out of the market – potentially for a lifetime.

Ollie Smith is UK editor at Morningstar

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Ollie Smith

Ollie Smith  is editor of Morningstar UK

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