Many reports suggest that young people struggle to save or in many cases have stopped saving completely. In this article, the Brand Financial services team explores some of the reasons for this and whether the Lifetime ISA (LISA) has lived up to expectations.
LISAs were introduced in 2017 as a government initiative to promote saving, for those aged 18 to 39, either for a first home or to help fund retirement.
Those eligible can save up to £4,000 a year and the government adds a 25% bonus on top of that. Therefore, in theory new savers could save £5,000 per year, giving them a greater chance of affording that all important first home, or, if they’re more forward thinking, start to think about their retirement.
However, the world is not the same place as it was back in 2017 and a stationary plan is never going to work for a generation that largely lives day-to-day. On top of that, changing times, rising prices, stagnating salaries and poor financial education are perhaps some of the reasons that the upcoming generation have lost sight of their financial futures.
For those young people who can afford to save, a LISA can be effective. The 25% government bonus essentially gives savers free money on top of their savings, which should act as a great incentive to cut back on spending habits and begin to think about the future. The money, as well as the bonus, is tax-free, as is any investment growth (if a stocks and shares LISA is chosen) or interest (if a cash LISA is chosen). This helps with long-term savings and investment and can be particularly useful for retirement plans. Importantly, contributions can continue until age 50, giving savers more time to save particularly as earnings tend to increase with age.
A LISA is particularly attractive if used as a deposit for a first home, helping young savers get on the property ladder, something that perhaps may appear an unattainable dream for many. The LISA can help make this dream a reality, although there is one key issue; the house price cap of £450,000 has not changed since 2017, while house prices, particularly in major cities, have increased dramatically. This has caused young people to find it particularly hard to find a suitable home and then face penalties if they attempt to withdraw their money for a home that is priced over the threshold.
Young people today live fast-paced, flexible, and insecure lives. These are traits that do not resonate with saving, and even less so with a LISA. Any withdrawals from a LISA, which are not intended for a first home or retirement, suffer a 25% penalty on both the government bonus and the savings. This puts the young saver in an inflexible position, which is problematic for those who face unexpected costs, university debt, or job insecurity.
According to HM Revenue and Customs, in 2024/25 Lifetime ISA savers paid around £102 million in withdrawal penalty charges (an increase from £75.3 million the previous year). But this penalty doesn’t just repay back the government bonus; it also takes some of the original savings.
Let’s look at an example:
- Anton, aged 25, has saved the maximum amount of £4,000 in his LISA for the last two years.
- The government bonus has topped this up and he now has savings totalling £10,000.
- If he withdraws his money for any reason other than buying his first home, retiring (from age 60) or is terminally ill, he will pay the following penalty:
- £10,000 x 25% = £2,500
- This leaves Anton with £7,500 – £500 less than he originally saved.
If Anton, when he started saving, was confident he would use the money to buy his first home (and remembering that this has to be under £450,000) or he could lock away his savings (for the next 35 years!) until he reached age 60, it was a risky place to save his money. This alone makes the product unsuitable for anyone who faces an uncertain future.
Lifetime ISAs were designed to incentivise young people to plan for their futures, but the reality is that many are faced with multiple lifestyle challenges. Products need to be reformed to be more flexible to adapt to the same changes that young people face, rather than force a financial punishment when money needs to be withdrawn, which may be out of pure necessity.
In the meantime, advisers and paraplanners can really add value to support the younger client by explaining in full the advantages of starting a disciplined savings habit early, but also the reality of how the current penalty works on a Lifetime ISA and the alternatives such as other ISAs and pensions which offer more flexibility.
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