Finally, some potential good news for those looking to get a foot on the property ladder, or save for later life?
Budget speculation is starting to mount with reports that the chancellor is considering cutting the Lifetime ISA (LISA) early-access penalty.
This would be a welcomed move, especially if coupled with an increase in the £450,000 limit on the value of the first home that can be bought.
This article isn’t personal advice. ISA and tax rules can change, and any benefits depend on your circumstances. If you're not sure what’s right for your circumstances, ask for financial advice.
How does the LISA work now?
You can add up to £4,000 each tax year into the LISA and the government will add an extra 25%. So, for every £4 you save, you get £1 extra – up to £1,000 per tax year.
After 12 months from the first payment, you can use the money to make an eligible house purchase for a property worth up to £450,000. Or you can wait until you're 60 and take your money out then.
This acts as a huge incentive to save for your first home, or later life. However, if your circumstances change, you risk being levied with an early-access penalty.
If you want to take money out before you're 60 and you aren't buying your first home, there's usually a 25% government charge. That not only takes away the government bonus, but a portion of your own hard-earned savings too, meaning you could get back less than you put in.
What could the rumoured LISA changes mean for you?
Reducing the LISA penalty to 20% removes this issue. It makes sure that no-one who’s trying to do the right thing in building up savings feels like they’ve been penalised for doing just that.
The change would certainly make the LISA more attractive. We’d also like to see it coupled with an increase to the £450,000 limit on how much a qualifying property can be worth.
This limit hasn’t been revised since LISAs were first launched and since then, house prices have surged.
This means that many people, particularly in London, would find it difficult to find a first home within this limit. An increase would be a big benefit in helping people get that all important first step on the housing ladder.
What about those using a LISA for later life?
If the LISA penalty was cut completely, it would be an enormous benefit to groups like the self-employed who aren’t covered by auto-enrolment and don’t benefit from an employer contribution to a workplace pension.
The shifting nature of their income means many can be hesitant to lock their money away in a pension until the age of 55 (57 from 2028) and instead prefer a LISA.
The 25% bonus acts in a similar way to basic-rate tax relief on a pension with the added incentive that withdrawals from age 60 are tax free. A slash in the penalty would act as a further incentive to save and invest.
We’d like to see further reform to help boost the retirement prospects of the self-employed even further.
As it currently stands, you can’t open a LISA if you’re over 40. You can also only contribute and receive the government bonus until age 50.
Given that lots of people become self-employed later in life, we’d like to see self-employed people being able to open, contribute to and receive a government bonus until 55.
Remember, savings outside a pension (like in a LISA) could affect your entitlement to means-tested state benefits.
We’ll find out whether or not the chancellor makes these LISA changes and more when he delivers the 2024 Spring Budget on 6 March.
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