Should I withdraw my savings from my Lifetime Isa due to house price rises?

I’ve had a Lifetime Isa (Lisa) since they launched in 2017, as I’m saving for my first home.

For the first five years I maximized my contributions, saving £4,000 a year, and with the government bonus and interest on top, I now have over £25,000 in the account.

There is a limit of £450,000 on the value of a property that can be purchased with Lisa’s savings. This was perfectly adequate in the East Midlands, where I lived until last year.

But in 2022 I moved to London. I stopped adding money to the Lifetime Isa, because I think I would struggle to buy a suitable house in London for less than £450,000.

Is there likely to be any movement from the Government on the maximum property value?

Otherwise, I and many others will have to withdraw our money (and pay significant penalties) in order to buy our first property.

Is it worth taking my money out of a lifetime Isa now that interest rates on savings are higher to try to recoup some of the penalty that will be lost, or should I keep it in the Lisa in the hope that the government will do the right thing? ? ?

Also, can it be transferred from Lisa to Isa so it stays in a tax free wrapper? Via email

Helen Kirrane from This is Money responds: Many banks, not to mention potential owners, demand that the maximum property value in the Lisa be increased.

Savers aged 18 to 40 can save up to £4,000 into the account each tax year and the Government will add a 25 per cent bonus, up to a maximum of £1,000, each year.

Lisas can be used to buy homes worth up to £450,000, both within and outside London.

But average house prices in London remain the most expensive of any region in the UK, with an average price of £528,000 in June 2023, according to the ONS House Price Index.

This is £78,000 more than Lisa’s maximum property value, meaning first-time buyers like you looking to get on the property ladder in London could be stuck.

We’ve asked property experts for advice on what you should do.

Will the maximum value of the property be increased?

Brian Byrnes, from savings and investment platform MoneyBox, responds: Market conditions have changed considerably since 2017, so Moneybox has been campaigning for all-party commitments to review the Lifetime Isa property price cap before the next election.

While it is impossible to predict the future, our proposals that the maximum Lifetime Isa property price be indexed and subject to an annual review have been welcomed.

With an Autumn Statement and Spring Budget in the next six months and an election on the horizon, it won’t be long before we have greater clarity on the measures that will be taken to meet the needs of first-time buyers in the future. .

Tom Selby, head of retirement policy at AJ Bell, responds: We know that the Government is open to reforming Isa and potentially simplifying it.

But it is unclear whether that extends to improving the terms of existing products like the Lifetime Isa.

There is a strong argument that the Lifetime Isa house price threshold should be increased and the exit penalty reduced from 25 per cent to 20 per cent, but there has been no formal indication that either is under consideration.

Sarah Coles, head of personal finance at Hargreaves Lansdown, responds: More and more industry sectors are demanding this, but unfortunately, we cannot guarantee that it will happen at the time you want to purchase.

At Hargreaves Lansdown we believe that maximum property value should be linked to the price of the house.

Some savers hoping to get on the property ladder choose Lisa as a home for their savings, but those hoping to buy in London find the maximum property value of £450,000 a barrier.

What are the sanctions?

Helen Kirrane from This is Money responds: If you withdraw money from a Lisa for any reason other than purchasing a first property before age 60, the government’s 25 per cent withdrawal charge will apply.

Any withdrawals within 12 months of your first payment will also incur a 25 per cent government withdrawal charge.

The only other reason you can withdraw funds is if you are terminally ill.

When he maxed out his contributions for five years, he paid in £20,000 and received a £5,000 government bonus in those five years, building up £25,000 in his lifetime Isa.

If you withdraw this money, without using it for a suitable home deposit, the 25 per cent penalty would be applied to the total £25,000, leaving you with £18,750 and £6,250 out of pocket.

Should you take money out of a lifetime Isa?

Brian Byrnes responds: This really depends on your intentions. If you’re not in a rush to buy right away and can be flexible about where you’ll ultimately purchase your first home, I would recommend really considering your options before incurring the penalty.

It would take this reader a long time to save outside of the Lifetime Isa to recoup the loss of the Government bonus in their deposit savings.

The upcoming Autumn Statement and elections on the horizon will provide more clarity to all political parties on the extent to which they will continue to support first-time buyers and future-proof the Lifetime Isa to support the next generation of homebuyers in the United Kingdom.

Tom Selby replies: This will depend on the circumstances, but you should be aware that the 25 per cent early withdrawal fee charged by the government is actually a 26.25 per cent penalty.

It would take a long time to recover it through slightly higher interest rates. It’s worth remembering that the Lifetime Isa can be accessed tax-free from age 60, so if it’s possible to build up a deposit for a first home without touching the Lifetime Isa, this could be beneficial from a purely tax perspective.

Retirement fund: Besides using Lisa to buy a first home, the only other penalty-free option is to withdraw the money after age 60.

However, this will not be an option in all circumstances. You should be absolutely sure you have no options but to access your Lifetime Isa early (and take the penalty) before making that decision.

Sarah Coles responds: If you are on track to buy a property worth more than £450,000, you should start by calculating three different scenarios.

Start by calculating the penalty you would pay if you withdrew the cash today.

Then calculate the possible growth between now and the time you want to buy, and calculate the penalty if you had to withdraw this larger sum.

Finally, look at the position you would be in if you left the money to grow in the Lifeitime Isa and were able to buy a property using it.

The difference between the first and second figure is what you would lose if you persevered with a Lifetime Isa, should the rules change. The difference between first and third is what you would win if you were lucky and the rules changed over time. Your decision will come down to whether the upside potential is worth the risk of the downside.

Can money be transferred from a lifetime Isa to another type of Isa?

Sarah Coles responds: If you choose to give up the Lifetime Isa, you can transfer to another type of Isa, assuming they accept transfers. However, you will pay the same penalty as if you were withdrawing the cash.

Brian Byrnes responds: Yes, you can transfer a lifetime Isa directly into an Isa, but it will depend on the provider you choose.

Your savings will remain tax-free as long as you transfer the funds via an Isa transfer rather than withdrawing the funds and putting them back into an Isa.