If it sounds too good to be true, it probably is, as the old adage goes. If someone offered you free money, the first thing you’d ask is: “what’s the catch?”
So when the government says it’s willing to give you up to £1,000 a year, for up to 32 years, it’s certainly worth taking a step back before diving in.
The Lifetime Isa (Lisa) has been touted as a dual purpose savings product, designed to help people at different points in their life – as an alternative to a pension for retirement, and as a way of putting money towards a first property. For every penny you deposit up to £4,000 annually, the government will give you a 25 per cent top up from the ages of 18 to 50, with a maximum of £1,000 per year. It is expected to be launched in April next year.
When using it to contribute towards your first property, the terms of the Lisa specify that the maximum value of the home must be below £450,000. All very well, if you don’t live in London, where average property prices are already over £500,000 and rising.
If the supply crunch isn’t tackled and the city’s population continues to rise, Oxford Economics puts the London average house price at over £1m by 2030, meaning that unless the cap on property value is pegged to the London housing market, the Lisa alone will be as good as useless for purchasing an average house in the capital.
Adrian Lowcock, investment director at Architas, is “a little surprised that the disparity of the London market was not recognised in the same way it was in Help to Buy Isas.” Lowcock asks why the allowance needs a cap on the value of the property at all. “By trying to focus on those who really need the support, this cap makes the Lisa more complicated. It would be better to have no limit, which would be more supportive of saving generally,” he says.
Lisa Caplan, head of financial advice at Nutmeg, says that “it’s very possible that both the annual cap and the house price restrictions will be updated periodically to rise roughly in line with inflation and house price rises respectively. The main Isa cap has changed almost every year for the past decade – it’s very easy for the government to move these around.”
Even so, the limited amount that you can currently save into the Lifetime Isa each year – just £5,000, including the government bonus – will make it difficult to fund a typical deposit of about 20 per cent. If Oxford Economics is correct and average property prices reach £1m by 2030, the amount of deposit a Lisa saver might need would be around £200,000. Notwithstanding any changes to the scheme, even after 32 years of saving and investment returns, you’d still be short of the amount required for an average property.
“With a savings cap of £4,000 a year, you might wonder whether you can ever amass enough for a London deposit,” says Caplan. “Bear in mind two things”, however. “First, you can combine Lisa savings with savings from other Isas or cash to build up your deposit”, and second, don’t “forget about investment growth and the power of compounding returns”.
It is, of course, quite unlikely that anyone is going to wait until they’re 50 to fund their first house purchase. “A more realistic approach would be that someone uses it for 10 years, gets £10,000 from the government and £4,000 for each year they put in, giving them £50,000 plus some returns,” says Lowcock.
“While that doesn’t mean the Lisa is of no use – you can still use it for retirement purposes – it does mean that you seriously need to consider alternative options at the same time,” says Lowcock. “The 25 per cent government bonus is not as attractive as the tax relief on pensions for higher rate taxpayers, for example. Company pension schemes where the employer matches contributions you make is also a more attractive way to save for retirement.”
Offering what is essentially free money may seem like an unpassable opportunity, and is certainly a stimulus to get a generation averse to saving to do so. But the Lisa in its current form won’t be a silver bullet for savers – especially for those aiming for the middle market and above, and especially those who want to stay in London.
This article appears in the forthcoming edition of Money magazine, which will be distributed for free with the paper on Thursday 27th