Lifetime Isas: Are they worth it and should the cap be higher?

The number of young savers maxing out Lifetime Isa allowances has doubled since launch in 2016 as house prices reach near-record highs, according to new research.

Lisa savings accounts allow aspiring buyers to save up to £4,000 per year tax-free and receive a 25 per cent government bonus when they buy their first property. 

A new report by Hargreaves Lansdown reveals a number of its Lisa holders have maxed out their allowances as they try to build a deposit.

Sarah Coles, from Hargreaves Lansdown, said: ‘A record number of aspiring buyers are maxing out their Lisa allowances as house prices soar. 

‘Just under a third of people paying into an HL Lisa so far this tax year have put in the maximum allowed, in a race to build a big enough deposit.’

Similarly 30 per cent of those saving into a Moneybox Lisa, which offers a market-leading rate of 0.85 per cent on its cash version of the account, have maxed out their allowance for the financial year.

The investment platform expects another 10-20 per cent to max out before the end, on 5 April 2022. 

Cecilia Mourain, from Moneybox, said: ‘More people than ever before are aware of the benefits of the Lifetime Isa and undoubtedly this product provided a significant boost to many first-time buyers, helping them save for a deposit sooner than would have otherwise been possible thanks to the 25 per cent cash bonus paid out by the government to Lisa savers every tax year.

‘However, every day we still welcome customers who until recently were unaware of this product and we believe that there are many more people who could benefit from the government bonus who have yet to open an account.’

The amount held in savings was always going to increase as more was paid in but the average saved in a Hargreaves Lisa has almost tripled to over £9,500 since its launch, which has prompted calls for an increase to the current Lisa limits.

Coles said: ‘While we’re putting in the effort, we need the Government to play its part too and revisit the Lisa limits. 

‘The annual allowance has been held at £4,000 for almost five years. 

‘And while it’s great that so many people who are saving for a property are taking the opportunity to max out their allowance, it’s also a sign that an awful lot of them would do more if they were allowed to.’

The average withdrawal has also been rising and hit a peak of almost £18,000 in September.

It comes as the average house price in the UK rose by £27,000 to £275,000 between December 2020 and December 2021.

If the £450,000 property limit for the Lisa had risen at the same pace it would be £562,500, over £100,000 more than the current level.

‘Setting a fixed limit and then walking away to leave buyers to wrestle with rising prices isn’t good enough. 

‘Overall limits need to be linked to house price inflation, so buyers know they won’t be getting into a scheme they could be forced out of by a hot property market,’ said Coles.

Mourain added: ‘As with any schemes introduced to support people to buy their first homes and save for retirement, it’s important they are reviewed regularly to take into account changing market conditions.’

Should you opt for cash or stocks and shares?

If buying a home is not your priority and you would prefer to save towards retirement, the Lisa bonus is equivalent to free money towards your pension pot. 

The interest is also tax-free but you cannot withdraw it before the age of 60. It appears the majority are using it to buy a home – the only time the Lisa can be used without penalty. 

If you are considering opening a Lisa account you will need to decide between a cash Lisa and a stocks and shares Lisa.

The length of the investment is likely to dictate which Lisa to go for, said Rob Morgan, chief analyst at wealth manager Charles Stanley.

‘For retirement, a Lisa (or pension) can more comfortably be devoted or to riskier assets such as shares. 

‘However, for anything less than five years then it is best to stick to cash. 

‘Market volatility could mean your investments fall just before your purchase, and it could even mean you fail to reach the deposit amount you required and scupper your plans.

‘For lots of people buying houses a Cash Lisa is therefore the much safer option – in the shorter term much of the return you are going to get is from the government top up.

‘If you are investing for ten years or more, it’s clearer cut that you should use investments that could grow your money ahead of inflation through the compounding of returns.’