Money-saving guru Martin Lewis has responded to one parent’s question about whether her 18-year-old daughter should open up a Lifetime ISA now that she’s legally old enough to do so
Swathes of parents could be missing out on a ‘free’ £1,000 bonus that could help their children get onto the property ladder. With soaring house prices, rising energy bills, and climbing council tax – owning your own home seems an impossible feat for many young people.
However, speaking on his eponymously named BBC podcast, Martin Lewis explained how a Lifetime ISA (LISA) could help young Brits get the keys to their new pad. The money-saving guru was asked by mum Sarah, who has an 18-year-old daughter, when her child should open a LISA now that she is legally able to do so.
“If your daughter plans to buy a first-time home and is pretty sure that she’s going to do it and it’s going to be a home that costs under £450,000 then putting money and saving money into a Lifetime ISA is really powerful,” Martin replied. “You can put up to £4,000 a year and the state will add 25 per cent on top. In other words, if you max it out, the state will give you a grand on top of the four grand every tax year until you buy [a house].”
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While the LISA account might seem too good to be true, there are a few catches. Firstly, you need to be aged 18-39 to open an account, and it has to be open for at least one year before you can use it. Therefore, parents should be urging their children to open an account as soon as possible, which you can do with just £1.
“The key problem is if you withdraw money from it for any other reason than buying the qualifying house – and qualifying means a house under £450,000, you’ll be charged an effective penalty of 6.25 per cent,” Martin warned. “Alternatively, you could leave it there until you’re aged 60 and [then] you won’t pay a penalty [for withdrawing the funds].”
Martin went on to advise Sarah that if her daughter is likely to be buying a house in the next five-10 years, in an area where buying a £450,000 property is feasible, it may be worth opening the account ASAP. Again, this can be done with just £1.
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Remember, you will pay a withdrawal charge of 25 per cent if you take money out of the LISA for any other reason than buying your first home (under the threshold), or after you’ve turned 60. Terminally ill people with less than 12 months to live can also withdraw money without a fee.
“Assuming no growth, initial savings of £800 will earn a 25 per cent government bonus of £200 and give you a pot of £1,000,” explained GOV UK. “If you wish to withdraw the entire pot, a 25 per cent charge will apply to the full £1,000. You’ll have to pay a government withdrawal charge of £250. This will leave you with £750.”
As previously reported, some Brits have been hit with staggering penalties of up to £11,000 due to unauthorised withdrawals. This has lead to growing calls for the government to increase the LISA cap from £450,000 to £600,000 (the average home in London in August 2024 was £531,000) or scrap the 25 per cent penalty.
“The high financial pressure of renting has made it difficult for people to save for their first homes, with first-time buyers increasingly well into their thirties and more likely to need family homes rather than classic starter flats,” Rajan Lakhani, a spokesperson for money-saving app Plum, said. “In many parts of the country, this is simply unachievable for £450,000. By raising the property price limit to a more equitable £600,000, Rachel Reeves can empower first-time buyers to buy the properties they actually need without fear of being penalised.”
*This article does not constitute financial advice. Always read the full terms and conditions before opening any type of savings account.
Have you been stung by strict LISA rules? Email liam.gilliver@reachplc.com for a chance to share your story
