Encouraging us to save has long been a government priority, and successive Chancellors of different political stripes have introduced flagship schemes to do just that, with varying rates of success.
Launched by George Osborne in December 2015, Help-To-Buy ISAs were designed to assist first-time buyers in saving for a deposit. The product offered a 25% government bonus on savings used for a first home, up to a maximum of £3,000.
The maximum property value which the Help-To-Buy ISA could be used to purchase was £250,000 outside London, and £450,000 in London. That may have been realistic at the time, but soaring property prices have meant that these limits are increasingly out of step with current first-time buyer house prices in many areas of the country.
The Help-To-Buy ISA has been closed to new applicants since November 2019, but existing holders can continue saving until November 2029.
Lifetime ISAs were introduced by Chancellor Philip Hammond in 2017, and they are still open to new applicants. This product is aimed both at those saving for a first home and those saving for retirement, and also offers a 25% bonus, this time on savings of up to £4,000 a year.
The property price limit for Lifetime ISAs is £450,000 across the board, making them more suitable for current house prices, at least outside London. Applicants must be aged between 18 and 39 when they start the ISA, and cannot make contributions once they reach the age of 50. Uptake of the Lifetime ISA has grown steadily, especially among younger savers, and by 2023 over 1.2 million accounts had been opened.
The Lifetime ISA is more flexible than the Help-To-Buy ISA, but it has strict withdrawal rules, and stiff penalties if they are breached: the penalty is 25% of the amount withdrawn, which effectively means losing not just the government bonus, but 6.25% of your own savings.
According to HMRC data, around 25% of Lifetime ISA withdrawals were penalised, with reasons for early withdrawals ranging from changing life circumstances, ineligibility for the property criteria, or simply an urgent need for the cash tied up in the ISA.
The potential for stiff penalties for early withdrawal, as well as the possibility that by the time the holder has amassed enough for a deposit on their first home the £450,000 property price limit may not be enough, has limited the appeal of Lifetime ISAs. Standard ISAs offer greater flexibility, with no penalties for withdrawal.
However, the generous government bonus, with a limit which renews each year, means that Lifetime ISAs remain a useful option for disciplined savers targeting home ownership or wanting to boost their retirement savings.