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Most of my friends haven’t heard of the Lifetime Isa. Maybe this is just as well, because less than two years after former chancellor George Osborne produced it as the rabbit from his budget hat, some politicians want to scrap it.
FT Money readers will have heard of the Lifetime Isa, but to remind anyone who’s forgotten, it’s a tax-efficient savings account available to anyone under the age of 40, accompanied by a generous government giveaway. It works just like a normal stocks and shares Isa, except you get a bonus of 25 per cent of the pot’s value, up to a maximum of £1,000 a year.
The sting is that the cash can only be used as a deposit on a first home or to fund retirement. Withdrawing it for any reason other than to buy a home before the age of 60 results in a penalty charge.
It has gained some traction, according to figures out last week: 166,000 Lisa accounts were opened in its first year, worth £517m in total.
So why do away with it? MPs on the Treasury select committee worry that it confuses people. There are fears they might stop saving into their workplace pension schemes, which are usually more lucrative than the Lisa, offering employer contributions that match or double the employee’s.
This seems unlikely. Anyone with the energy to arrange a switch is likely to have done enough research to realise it’s not a good idea to leave a workplace scheme. For those under the age of 40 who have heard of the Lisa, it is clearly a savings pot for those trying to scrape together a deposit on a first home.
This is where the real problem with the Lisa comes in: rather than helping everyone equally, it offers a reward to those most able to save. In other words, this just hands cash to those with more money in the first place. It’s also, potentially, just yet another way to reward people with parents wealthy enough to be able to open a Lisa for them when they turn 18 and stuff it full of cash each year.
For those of us diligently saving into a Lisa from our own income, though, there’s a second problem. I hate to moan, but even the maximum £1,000 a year isn’t going to move the dial when the average deposit for a house in London is currently £95,000 (according to estate agent Savills). There’s only one way most people are going to get anywhere near that deposit, and that’s with a windfall from their parents.
According to figures from insurer Legal & General, the Bank of Mum and Dad or Bomad, gave or lent around £6.5bn to their offspring in 2017, funding a quarter of all UK property transactions. And this explains why if you speak to anyone involved at all in the property world, there’s a now a cast-iron assumption that first-time buyers in their twenties and thirties have parents who can stump up the deposit. After all, they probably own a house, right? They’ve benefited from the property bull market.
Well no, actually. Even if you’re lucky enough to be from a comfortable middle-class family with an above average combined household income, if that family doesn’t own property in the south of England you’re in trouble. If they own a home in, say, south west Wales, where property prices are below 2007 levels, they may not have a lot of equity growth.
For my peers whose parents or grandparents bought in the south of England, a huge slice of accumulated housing equity can be unlocked through an equity release mortgage, or simply by downsizing to a smaller home. That’s before we even consider that older people are more likely to have multiple homes. A recent report by the Institute for Fiscal Studies found that one in six people over the age of 55 owned a second home.
People tend not to speak about how much their parents are contributing to their housing deposit. It causes friction. Everyone acknowledges that it’s unfair, so everyone pretends it’s not happening. As I stood around at a barbecue recently, a couple popped a cork as they told everyone they’d just had an offer accepted on a house. Nobody asks about the financial details, because that would be rude. But you can rest assured that those of us with no hope of parental contributions are crying inside.
Once on that housing ladder, rising prices give newbie property owners the chance to accumulate wealth much faster than their renting peers, even if both sets of people earn exactly the same salary. Moreover, ultra-low interest rates mean that in many cases, paying a monthly mortgage is cheaper than renting. The rest of us face toiling away, continuing to live in brown-carpeted, dank homes with leaky ceilings and the full complement of black mould, green mould and damp. Move somewhere nicer? It’s just not worth the extra rent — not when we’re busy trying to catch up with those Bomad customers.
So back to the Lifetime Isa. It’s nice to get a bit of help and I suppose it’s better than nothing. But if it was scrapped I’m not sure the people it’s aimed at — those trying to save for a deposit with no assistance from Bomad — would really notice the difference.