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Thousands of first-time buyers missed out on £244million free cash by not using savings scheme
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THOUSANDS of first-time buyers missed out on millions of pounds in free cash by not depositing their savings into a Lifetime ISA last year.
First-time buyers often use Lifetime ISAs or LISAS to get on the property ladder.
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But new analysis of government data by the savings and investing app Moneybox reveals that potentially thousands of first-time buyers could have benefitted last year if they utilised a LISA.
When you open a LISA, savers get a 25% bonus on top of any money put into the account, up to £4,000 a year.
So if you save the full £4,000 into the account, the maximum bonus you can earn is £1,000 a year.
However, only 56,100 people bought their first home using a Lifetime ISA in 2022/2023.
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It means out of 300,000 recorded first-time buyers purchasing a home in this period, up to 243,900 could have missed the government bonus offered by saving into a LISA.
This equates to a potential £243,900,000 of "free money" lost in government LISA bonuses in 2022/2023, according to Moneybox.
Saving a first home deposit now takes on average of ten years, according to Generation Rent.
However, for anyone saving with a LISA and who is able to save the full £4,000 each tax year during that period, aspiring first-time buyers could save £40,000 and also gain a boost of £10,000 through the government bonus.
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More than 18million Brits are currently eligible to open a LISA.
Brian Byrnes, head of personal finance at Moneybox said: "Saving the money required for a deposit continues to be one of the biggest hurdles many face on the journey to buying a home.
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"The LISA has been a fantastic helping hand for savers trying to get a deposit together, and perhaps more importantly, it has instilled healthy saving and investing habits that stay with people for life.
"An entire generation of first-time buyers have achieved their dreams of home ownership, with more than 170,000 homes purchased since the product was first introduced in 2017."
However, experts including Martin Lewis have warned that many are being left unable to reap the benefits of these savings accounts because of the finer detail.
First-time buyers using a LISA to purchase a property can only buy a home costing no more than £450,000.
If savers use the money to buy a property that is over the scheme's £450,000 limit they face a 6.25% withdrawal penalty.
This means that someone who has saved £20k could face only getting back £18,750 of their money if they choose to take it out.
And if you need to make a withdrawal for any other reason the charge is 25% of the amount withdrawn.
This is worked out after your bonus is paid – remember, you’ll only get the bonus if you take money out 12 months after your first payment into the account.
Brian said: "Introducing a penalty-free annual emergency withdrawal allowance so savers are not penalised if they need their money in an emergency could provide greater reassurance to those in need.
"Additionally, while the property price cap has affected less than 1% of Moneybox Lifetime ISA customers to date, if it had risen in line with house prices it would stand at £600,000.
"Therefore, we are calling for the price cap to be index-linked in line with house price inflation."
What is a Lifetime ISA?
FIRST-time buyers saving into a LISA can stash up to £4,000 into this account each year tax-free.
The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.
For example, if you save £4,000, you'll get a £1,000 bonus.
The amount you pay in is linked to your annual ISA allowance (£20,000 for 2023/24) – for example, if you pay £1,000 into your LISA, you can still pay £19,000 into other ISA products.
Any bonus you earn doesn't count towards your ISA allowance.
You can open a Lifetime ISA with any bank, building society or investment manager that offers the product.
You can only open a LISA if you're aged 18–39.
You can hold multiple Lifetime ISAs, although you can only pay into one each tax year.
You can also transfer your Lifetime ISA to another provider, for example, to get a better interest rate.
If you want to use a Lifetime ISA to buy a home, there are a few restrictions you need to keep in mind:
- Only first-time buyers can use Lifetime ISAs to buy a home, which means you can't own, or have owned, a home in the UK or anywhere in the world.
- You'll need to be buying a home for no more than £450,000.
- You must be buying a home you plan to live in – the scheme isn’t for buying a home you want to rent out, or a holiday home.
If you don't use it to buy your first home, you can continue paying into a LISA until you're 50.
You can then make full or partial withdrawal from your LISA, without paying a fee, when you turn 60.
What types of lifetime ISAs are there?
There are two different types of LISAs - a cash LISA and a stocks and shares LISA.
A cash LISA can be worthwhile if you are saving for your first home and are planning to buy within a couple of years.
Interest is paid tax-free on both the amount you contribute and on top of the government's bonus.
As the account is an ISA the interest earned doesn't count towards your personal savings allowance.
A stocks and shares LISA might be more suitable if you are saving over a longer period for retirement.
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This is more complex as investment gains come in as dividends, capital gains and bond interest.
Again, the interest earned doesn't count towards your personal savings allowance.
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