Earlier this week, Emma Reynolds, the Economic Secretary to Treasury, said ISA reform would be considered “in the round” but that the withdrawal penalty and purchase price cap for the Lifetime ISA were likely to stay.
Reports earlier this year had suggested that the government was looking at cash ISA reform that would lower the maximum saving limit per year to £4,000, a fall from £20,000, or scrap them completely.
Andrew Gall, head of savings and economics at the Building Societies Association (BSA), said cash ISAs are “popular and used for various savings objectives, ranging from emergency savings to dream holidays to enabling pension decumulation”.
He said research done by the trade body showed that three-quarters of UK adults with cash ISAs are against the government scrapping or reducing cash ISAs, with just 8% supportive.
Around 90% are “unwilling to take a risk with their hard-earned money” as it’s “important that they get back at least the amount they have put away”.
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Gall said that is a guarantee that “can only be provided with cash savings”.
“In addition, cash ISAs are a well-established and important part of the savings market, and fund mortgages and loans to families and businesses, supporting UK economic growth,” he noted.
Richard Fearon, Leeds Building Society’s CEO, said it remained “concerned about the long-term threat of a reduction in cash ISA allowances”.
“Our members have already voiced their opposition and they are likely to stay worried until changes are completely ruled out. Reducing the amount [that] can be saved would have significant effects on savers, on mortgage rates and on wider aims to increase the size of the mutual sector,” he said.
Fearon noted that investments will “not be suitable for everyone” and there were a lot of circumstances where people “shouldn’t risk their savings being undermined by short-term movements in share prices”. He noted that most of its cash ISA savers were pensioners.
“Money saved in cash ISAs is not dormant – we, and all building societies, use it to fuel our mortgage lending. If you reduce that funding, mortgages would become more expensive for borrowers. The last thing families and aspirational homeowners need is to have greater pressure on their mortgage bills when millions are already facing cost-of-living pressures.
“We welcome greater choice for savers and support efforts to give more people the confidence to invest where it’s right for them. This is the best approach to naturally foster a stronger investment culture in the UK while maintaining the current rules on cash savings. We must preserve genuine choice for those with shorter-term savings needs even as rules are relaxed to increase provision of affordable financial advice.
“We will continue to make the case on behalf of our members for retaining the current rules,” he said.
Lifetime ISA withdrawal penalty and purchase price cap should be reviewed
Gall said Lifetime ISAs are a “useful product”, particularly for potential first-time buyers.
However, the “outdated house price thresholds and unfair withdrawal penalty” need to be reviewed so that the products can “continue to deliver on their original intentions”.
“The penalty withdrawal charge and the price threshold put people off, as if a saver needs to access their money for some other reason, not only do they lose the government bonus, but also some of their own savings.
“Removing this trap would help to increase take-up. Whilst it is appropriate for the government to recoup the bonuses paid in these circumstances, it shouldn’t be looking to profit from potential first-time buyers whose circumstances change,” he said.
Charlotte Harrison, CEO of home financing at Skipton Building Society, said she was pleased that the Economic Secretary to the Treasury had “acknowledged the role of the Lifetime ISA in helping one in 10 first-time buyers access a home of their own since it was launched in 2017”.
She stated that Lifetime ISAs have already been used in over 227,000 house purchases and the growing appeal of the product meant that further growth in Lifetime ISAs being used in this way.
“The government has ambitious targets for building 1.5 million homes and a commitment to affordable housing. Given we anticipate that, alongside the building of homes, housing affordability will remain a key challenge, schemes such as the Lifetime ISA have an important role to play to continue to help unlock affordability, especially for first-time buyers,” Harrison noted.
She said comments on the purchase price cap and withdrawal penalty were “disappointing”.
“The Skipton Group Home Affordability Index analyses data from across 363 local authority areas in Great Britain, and forecasts that, by the end of 2027, the Lifetime ISA house purchase price cap of £450,000 will fall below the average first-time buyer property price in 12% of local authorities in England.
“This means that the current level of the maximum purchase price cap isn’t just a London issue, as she suggested,” Harrison explained.
She said the purchase price cap should be raised to a minimum of £500,000 to “ensure the Lifetime ISA remains relevant for those it is designed to help”.
Harrison added that the unauthorised withdrawal penalty should be lowered from 25% to 20% so savers are “not losing capital as a result of changing circumstances, so the minister’s suggestion that it was ‘quite normal’ that there should be a penalty was disappointing”.
“We believe that the Lifetime ISA offers value for money for both the government and individuals. It is unique in providing an incentive to save for a home purchase. This helps instil good savings habits and builds financial resilience, which are both important government objectives, in addition to unlocking affordability for a house purchase, particularly for first-time buyers and helping people save for retirement.
“However, for the Lifetime ISA to continue to be successful in supporting with this, we feel it’s vital that our Lifetime ISA recommendations are considered by the government and we look forward to engaging with the minister and her officials on this,” she said.
Brian Byrnes, head of personal finance at Moneybox, said the Lifetime ISA has been “one of the most impactful financial products introduced in recent years, helping young people across the UK take control of their financial futures – particularly when it comes to buying their first home”.
He noted that in the past year alone, the firm has reported a 34% increase in customers opening a Lifetime ISA, and 80% of Lifetime ISA savers earn £40,000 or less, so it is vital support for those who need it most.
“While it’s encouraging to see it on the agenda, we believe now is the moment to take action. Small, pragmatic changes – such as increasing the property price cap and adjusting the unauthorised withdrawal penalty – would ensure the Lifetime ISA continues to deliver for first-time buyers in a fast-changing economic landscape.
“These aren’t radical changes – they’re common-sense updates that would make a great product even better,” Byrnes said.
He added that there is a common misconception that banks avoid offering the Lifetime ISA due to “mis-selling concerns”, as it has a dual purpose of saving for a first home or being put towards retirement.
“The reality is that administering a Lifetime ISA is significantly more complex than other ISAs due to the need for real-time connections with HMRC. For many larger institutions with legacy tech infrastructure, this operational burden – combined with the £4,000 annual contribution limit and lower average income of LISA savers – makes it commercially challenging. By addressing these barriers, we can unlock greater provider participation and wider access,” Byrnes added.
He said the Lifetime ISA is “already working” and “changing savings habits and supporting tens of thousands of people across the country”.
However, it “hasn’t yet reached its full potential” but, with changes, the government can “ensure it continues to meet the needs of future generations, while remaining a cost-effective product for the UK government”.
“We encourage policymakers to build on the solid foundation already in place and future-proof a product that is delivering real, measurable impact for young people nationwide,” Byrnes added.
