The London LISA problem
ISAs are set for a starring role in next week’s Budget as Chancellor Rachel Reeves searches for ways to kickstart economic growth.
The Treasury is reportedly mulling a slash to the cash ISA ceiling from £20,000 to £10,000 to stop Brits hoarding cash, and encourage investment into domestic stocks.
Dividends are also potentially in the firing line and rumoured to be subjected to higher taxes, making it crucial to have investments in a tax-efficient wrapper, such as a stocks and shares ISA.
But much to the chagrin of many young Londoners, one ISA that doesn’t appear up for discussion is the Lifetime ISA or LISA.
What is a Lifetime ISA?
In the 2016 Autumn Budget, then Chancellor George Osbourne unveiled the LISA, aimed at helping young people save more efficiently.
The product was launched in April 2017, allowing individuals aged 18 to 40 to contribute £4,000 tax free each year, until they hit the £20,000 ceiling, to either put towards the purchase of a first home or use for retirement.
It took the place of the Help to Buy ISA, with both politicians and real estate industry figures agreeing the higher annual savings limit and greater property price flexibility of the LISA was a more attractive alternative.
But nearly a decade on, many first time buyers in the capital are unable to benefit from the scheme.
Pricing woes
Earlier this year, the Treasury select committee released a long awaited report on the LISA outlining issues with the product such as the 25 per cent penalty on unauthorised withdrawals.
Following its release, the government acknowledged the account’s importance in helping people invest and achieve home ownership.
However, Labour failed to express a commitment to altering the property price cap, which has been frozen at £450,000 since its introduction, despite house inflation rising by nearly 31 per cent over the past eight years..
If the LISA cap had kept pace, it would now stand at approximately £600,000.
For the majority of the country the cap does not pose a major problem, with the average house price in September 2025 standing at £272,000, according to the latest data from the Office of National Statistics.
In April 2017 it stood at £220,000, making the LISA fit for purpose upon being made available for investors.
The London difference
But for Londoners, it’s a different story. Even at the time of the LISA’s introduction,the average price for a property in London stood at £483,000, well above the scheme’s ceiling.
Since then, prices in the capital have continued to soar, with the average property hitting £550,000 just in September.
Only roughly 30 per cent of the current London housing stock is below the £450,000 threshold, of which the majority are studios or one-bedroom flats, making it impossible for young Londoners to use the LISA to buy a home in which to start a family.
For most Londoners who have saved for their first property in a LISA, house prices exceed the limit, causing withdrawals for properties over the cap to fall outside of permitted conditions.
This leaves holders subject to a 25 per cent penalty on the total amount withdrawn, including the government bonus and their own money, effectively causing them to lose 6.25 per cent of their own savings.
Ending the freeze for London?
The cap has caused controversy in London, placing those who opt to use the LISA for more expensive properties, in increasingly strained financial conditions upon being penalised.
Others have since stopped paying into their account after realising it was not beneficial in the London market.
This has led many financial advisors and estate agents to call for a separate LISA, tailored specifically for London prices, in order for investors to use their savings without fears of ultimately losing capital.
However, some have argued that the national cap should be raised in line with wider market conditions.
Brian Byrnes, head of personal finance at Moneybox, said: “We recognise concerns, particularly from some of our London-based customers, around the £450,000 property price cap.
“To ensure the product remains simple and accessible to those who need it most, we support a single national cap reviewed annually to keep pace with real market conditions.
“Savers shouldn’t be punished for using the LISA as it was intended, buying a first home or saving for retirement.”
Moneybox’s call for a national cap comes as more areas just outside of the capital, such as Brighton and Cambridge, see house prices inch closer to jumping the limit.
They expected to surpass it by 2030, and if house inflation keeps rising, LISA holders across other areas of the country may also soon see their savings be priced out.