Fresh research by HM Revenue & Customs has cast renewed doubt on the effectiveness of the Lifetime ISA (LISA) as a tool for first-time homebuyers, amid mounting calls for reform of the scheme’s rules and limits.

The survey of more than 1,600 holders found that just under half (46%) opened a LISA to save for their first home, while almost as many (45%) did so for retirement – a split that critics say has blurred the product’s purpose and undermined its usefulness.

The LISA, introduced in 2017, allows savers aged 18 to 39 to invest up to £4,000 annually, with the government providing a 25% top-up. Funds can be used to buy a first property worth up to £450,000, provided the account has been open for at least a year. Withdrawals for other reasons incur a 25% penalty, which removes not only the government bonus but also part of the saver’s own contributions.

HOMEBUYER HELP

HMRC’s data show that 16% of account holders had used their LISA to buy a first home within the rules, with 29% of this group saying the bonus had been “essential” in enabling them to get on the housing ladder. Half said it was important but not decisive, while a fifth described it as “nice to have”.

However, the report highlights widespread frustrations with the £450,000 property cap, which has not risen since the scheme’s launch despite sharp growth in house prices. Just over half of first-home savers agreed the limit was sufficient.

In London, where the average first-time buyer property now exceeds £450,000, more than two-thirds disagreed.

NOT FIT FOR PURPOSE

Rachael Griffin, tax and financial planning expert at Quilter, said the product was no longer fit for purpose in its current form.

“Put simply, the £450,000 property price cap no longer deals with the reality of the ever more expensive housing market,” she said.

“Many who have saved diligently find they cannot use their LISA for the property they need without facing a financial penalty. This undermines confidence in the product and adds to its complexity.”

She added that homebuyers were being disadvantaged in competitive markets and said: “There have been numerous anecdotes of buyers being constantly outbid by small sums over the threshold, as rivals know that doing so strips them of the ability to use their LISA.”

The report also underlined the heavy cost of unauthorised withdrawals.

Just over one out of 10 (11%) holders had triggered the 25% penalty, with 86% aware they would lose not just the government bonus but some of their own savings.

“This underlines how desperate people were for access,” Griffin said.

BENEFITS THE BETTER-OFF

Nearly half of LISA holders sit in higher or additional rate tax bands, with most concentrated in London and the South East – raising questions about whether the product disproportionately benefits the better-off.

While the LISA has provided critical support for some first-time buyers, HMRC’s own evidence suggests many would have managed to purchase eventually without it.

With the Treasury now consulting on reforms to the ISA landscape, industry figures argue that the Lifetime ISA requires more than minor adjustments.

“A fundamental rethink is needed to create simpler, clearer products that genuinely meet people’s savings goals, rather than leaving them penalised or confused,” Griffin said.