Of all the counter-productive, demand-stimulating measures successive governments have introduced to try to palliate the effects of endlessly climbing house prices, the lifetime Isa may have the dubious honour of being the most perverse.
Announced by George Osborne, although introduced under Philip Hammond’s chancellorship, it was designed as a vehicle to encourage long-term saving. To sweeten the pot, the government pays in £1 for every £4 saved a year, up to a maximum bonus of £1,000.
For young people struggling to save, that guaranteed boost, in an environment of miserly interest rates and uncertain performance from stocks and shares, was very tempting; it’s estimated that about 1 million people have paid into a lifetime Isa since they were launched in 2017.
But there’s a sting in the tail. Unlike the pension freedoms introduced for older people, lifetime Isas are extremely restrictive. Account holders may only withdraw their funds for two reasons: a pension at age 60, or buying their first home.
If they try to take their money out for any other reason, the cost is punitive. The government claws back 25% of whatever they take out, directly plundering people’s savings.
Squint at this and you can just about see the logic of it. Lifetime Isas are supposed to encourage saving for long-term goals, so it makes sense to build fences around that pot.
But in fact, another stroke of Treasury brilliance makes it completely indefensible: that the maximum value of the first home you can buy using lifetime Isa funds is arbitrarily capped at £450,000 – and that limit is not index-linked.
What that means is that the actual purchasing power of the lifetime Isa has been decaying ever since it was introduced. According to the Office for National Statistics, between December 2016 and December 2021 the average house price in England rose by 24%.
The average spent by first-time buyers remains, in much of the country, low enough that the cap is not a problem, at least not yet – although if we project house price trends along the “lifetime” of the lifetime Isa it will bite everywhere eventually.
But in London, where the housing and cost of living crises for younger people are most acute, the lifetime Isa risks turning into a toxic financial trap right now. According to Rightmove, the average cost of a first-time home is already north of £500,000.
Worse still, there is no provision for people buying together to pool their allowances. Getting a mortgage on a property worth more than £450,000 might be a stretch for many, but it is much less so for two people – for example, a couple of young professionals looking for somewhere to settle down, perhaps with room for a family.
All of this puts people who have paid into lifetime Isas in a very difficult position. Every year, unless there is a sustained pause or fall in house prices, the range of properties they can buy with their savings will narrow, even as the cash value of those savings accrues.
The best explanation I’ve had for this is that the Treasury wanted to avoid being seen to be helping the better off; one government source cited research from the Resolution Foundation, which suggested that lifetime Isa wealth is disproportionately held by individuals in the top income quintile.
But this is harebrained logic. Any policy that compounds savings is going to benefit those who can save more, and one aimed at helping first-time buyers getting over the line must necessarily support those who are almost there, rather than people nowhere near purchasing a home.
Unless action is taken, for the sake of these optics, hundreds of thousands of people may end up having to hand the government a quarter of their savings if they want to buy a decent home.
Yet there is no sign of any action. According to government sources , the Treasury’s upcoming internal mortgage market review will not look at the lifetime Isa.
If so, the Conservatives risk missing an easy housing policy win when there are few on the ground. Index-linking the cap (if they won’t abolish it) and allowing qualifying co-buyers to pool their allowances wouldn’t cost much, except perhaps by encouraging people to actually open lifetime Isas.
But it would be a real boon to hundreds of thousands of savers – and an overdue quid pro quo for younger people as the government relaxes taxes on pensions. After all, in that case the chancellor managed to overcome any concerns about disproportionately aiding the better off.
Henry Hill is deputy editor of ConservativeHome
