Andy Burnham's £12k savers rule 'confirmed' as Brits warned of £450k 'trap'

Brits looking to buy a home are being warned to watch out for a £450,000 "trap" after Andy Burnham slashed the cash-free ISA limit. The PM's decision to cut under 65s tax-free ISA allowance from £20,000 to £12,000 already looked likely to hit first time buyers, and now experts have pointed out that the new rules could also allow people to fall into a worrying financial trap when they actually try and purchase a property. According to the current rules, home buyers using a lifetime ISA (LISA) to contribute to buying a home do not have to pay a withdrawal charge on this amount.

This means that they can use all of their savings plus the maximum government contribution of £4000 towards buying a property. However, some experts are warning that the system has a fatal flaw. Currently, the government only waives the 25% withdrawal charge on the LISA if the money is being used on a property that costs less than £450,000. This means that, if a house costs more than that, buyers could end up out of pocket. For example, if a LISA holder has saved £16,000 and received the maximum of £4000, that total sum of £20,000 would be subject to the 25% withdrawal fee.

In other words, the buyer would see £5000 go up in smoke and be left with a grand less than they originally saved. In other words, buyers could be left worse off that if they hadn't tried to save money using a LISA in the first place. And considering the average house price in London is already over £450,000, this 'trap' is more than just a hypothetical. Graham Nicoll, Financial Planner, Chartered FCSI at NCL Wealth Partners , called on the government to "scrap the cap", adding that we should not be "penalising buyers because of where they live or what they earn".

He said: "He commented: "The Government should be helping first-time buyers onto the property ladder, not pulling it away from under their feet with an arbitrary £450,000 cap and punitive 25% withdrawal charge. If the money buys their first home, the penalty should not apply! “My son is a great example of why LISAs work. The government bonus has given him a laser focus on maximising contributions, encouraging him to save more himself. He hopes to buy his first home next year.

That's exactly what the scheme should achieve. "I’d caution anyone potentially buying above the cap against further contributions and instead use a normal ISA or general investment account. It's too early to judge the proposed First Time Buyer ISA, but it mustn't repeat the same mistake."