Why the Lifetime ISA is not a simple to understand product

I’m gonna be upfront here, this is going to be a bit of a rough and ready post. It’s incredibly one-sided. But hopefully, I’ll be coherent to persuade you of one thing: the Lifetime ISA is a complex and confusing product.

The Lifetime ISA was drawn into the firing line after the Treasury Committee recommended it’s abolition (link). Some far smarter, wiser and more experienced people have made the case that the Lifetime ISA is a complex and confusing product. Most notably, former Pensions Minister Ros Altman (link).

Arguably, the most ‘no-brainer’ case for using a LISA is for those who are funding a house purchase. But even for these people the case is not as clearly made out as you’d think. Here are some reasons why.

Inheritance

Do you have parents? Grandparents? If you inherit a share of a family home sometime in the future that will block you from using the LISA towards your house buy.

Can you plan for that? No way, well except to get yourself written out of the will.

Joint ownership

If more than one Lifetime ISA investor is jointly purchasing a residential property, then each person must satisfy the Lifetime ISA requirements. Lifetime ISA investors can purchase a property as a joint owner with a person who already owns the property, but this is also subject to the conditions of the Lifetime ISA being satisfied.

Occupation

You have to intend to live in the property as your only or main residence. How long that’s for, nobody knows. Living there part-time, no idea. Got an overseas holiday home, no clue.

Helpfully, the government never set it out any more on this in the legislation. So if you’re an NHS worker, or regularly have to move jobs, you might find yourself on the wrong end of this. I’d like to give you some certainty, but nobody appears to know if the government will whack you with a penalty if you do end up leaving the home unoccupied. I’ve searched fruitlessly. If any wise owls out there know the answer please let me know!

Buy to let

Buy to let is therefore excluded. But there is a loophole to that. If you’re a crown employee serving overseas then you don’t have to take immediate occupation. In the meantime, you can buy to let until you return. Although, it’s not precisely clear what happens if you have to live on base on your return. The guidance notes and the legislation don’t seem to quite match.

There’s a cap

The house purchase price must not exceed £450,000. Good luck with that in London or South East England.

Also, there’s no mechanism in the legislation for that limit increasing. So, you’re gonna have to rely on a future government tinkering with the legislation for any increases. Otherwise, you’ve got to there’s a future reverse in house prices.

The cap applies even for share ownership

Want to buy 25% of a £500k flat in London (i.e. £100k purchase price)? You’re not allowed, the cap applies on the whole value, not just your share. So that probably rules out the savvy people co-purchasing their first homes in London.

You have to take a mortgage

Yep, you can’t buy the home outright. You can only use the LISA for a house purchase if you fund the purchase through a loan (mortgage) or under a home purchase plan.

You can only use it against the purchase price

You can’t use it against any solicitors fees, mortgage fees, stamp duty or anything else. Only the purchase price. So you’re gonna have to still save up a fair whack in another account to be able to pay all your purchase costs. That’s still better than the disastrous help to buy ISA which blocked you from using the funds on the exchange deposit!

Got a help to buy ISA?

You can have both a help to buy ISA and a LISA. But you can only use the funds from one. However, you can transfer from a help to buy ISA into a LISA if you want.

In a chain?

Watch out – because you’ve got 90 days from when you’ve withdrawn the funds to complete. Otherwise, you’ve got to put the money back. You can ask for an extension, but there are no guarantees. Hopefully, your chain won’t break. That never happens right?

Got a caravan?

Yeah, you might not qualify. Seriously. (link)

References:

Legislation: https://www.legislation.gov.uk/ukdsi/2017/9780111154618/pdfs/ukdsi_9780111154618_en.pdf

Government’s conveyancer guidance: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/691773/conveyancer__1___5_.pdf

Gov.uk Conveyancers technical guidance: https://www.gov.uk/government/publications/conveyancers-lifetime-isa-technical-guidance/conveyancers-lifetime-isa-technical-guidance

 

p.s. I know I’m being intentionally pernickety, it’s not all as bad as I’ve made out here. But, these rules do exist. And you do need to think about them. I know lots of you readers are very financially savvy, many savvier than me! But, do I think the average 20 year-old will get all this? No chance. But they need to if they want to use a LISA to fund their future first home. And what happens when potential savers or investors are faced with unnecessary complexity – they don’t save, they don’t invest. We need products that encourage people to save. They need to simple and accessible. They need to be easy to understand and usable in financial planning.

That doesn’t mean the LISA is a bad product – in fact, the generosity of the bonus is unbeatable for many people. That’s what makes this all the more frustrating. This is a product that could help so many people. But the implementation is so poor. And we’re not just talking complexity like forecasting life-expectancy for pensions is complex. We’re talking about complicated legislation that even lawyers need guidance to understand. Good luck to the rest of us!