The recent economic downturn means that for many young people, employment and home-ownership prospects seem bleaker than ever.
There was, however, a bright spot last month when the Treasury announced a welcome, albeit temporary, tweak to the Lifetime Isa.
This tweak provides an important and long-awaited improvement to the product, and must be made permanent to help the next generation of homeowners achieve their potential.
The benefits of saving with a Lifetime Isa are significant.
Introduced in 2017 to help 18 to 39-year-olds save for their first home (or retirement) the Lifetime Isa offers a 25 per cent government bonus on all savings up to £4,000 each tax year, meaning savers can get a £1,000 boost from the government each year.
Having already helped thousands of people get on the property ladder, we think that opening a Lifetime Isa should be a no-brainer for most first-time buyers.
Why, then, are relatively few younger savers using it?
We believe the answer lies in the early withdrawal penalty.
While for the majority of savers, the Lifetime Isa offers an excellent leg-up, for those who need to withdraw money for any reason other than to buy their first home or for retirement, there is one unwelcome string attached.
A 25 per cent withdrawal penalty means that if someone makes a withdrawal, they will lose the government bonus, plus £6.25 for every £100 deposited.
Understandably, this penalty puts off a lot of young savers, whose lives are changing fast, and often in a way that is simply unforeseeable.
Last month, in response to the financial impact of the coronavirus pandemic, the Treasury announced that the withdrawal charge on Lifetime Isas will be reduced from 25 per cent to 20 per cent between March 6 2020 and April 5 2021.
This means that savers who need to make an ‘unauthorised’ withdrawal will now only forgo their government bonus and will not incur the additional penalty.
The effective elimination of the penalty is a big positive for young savers and something that Moneybox has been calling for since 2018 over several meetings with the Treasury.
Incentive for savers
The question now is what happens beyond April 2021. To create the stability and confidence young people need to save and invest for their futures, the temporary reduction in the penalty charge must be made permanent.
While we appreciate the importance of encouraging long-term saving, we would argue that the loss of a 25 per cent bonus is sufficient incentive for people to avoid dipping into their savings if they can.
There is no need for any further disincentive. Unforeseen circumstances are part of life, especially for those within the 18-39 age group. A saver may meet a partner that already owns a house, or choose to return to study.
A product designed to help people achieve their long-term financial goals needs to be flexible enough to accommodate these changes in circumstance.