The Lifetime ISA's (LISA) dual-purpose design may be diverting
people away from more suitable products and putting part of their
savings at risk, according to a new report by the Treasury Select
Committee published today (30 June).
MPs found that the LISA's objectives to help people save for both
the short and long term makes it more likely consumers will
choose unsuitable investment strategies. Cash LISAs may suit
those saving for a first home but may not achieve the best
outcome for those using it as a retirement savings product, as
they are unable to invest in higher risk but potentially higher
return products such as bonds and equities.
In its report, the Committee describe current rules which
penalise benefit claimants as ‘nonsensical' and concludes that it
is possible that LISAs have been mis-sold to people who are
eligible for Universal Credit or Housing Benefit now or in the
future.
Under the current system, any savings held in a LISA can affect
eligibility for Universal Credit or Housing Benefit despite this
not being the case for other personal or workplace pension
schemes. The Committee determines that, if this isn't changed,
the LISA should be clearly labelled as an inferior product to
those who may at any point in their life be eligible for such
benefits.
Another issue raised by the Committee is the 25% charge for
withdrawing funds due to unforeseen circumstances. This charge
means that, as well as losing their bonus, LISA holders who need
to make an unplanned withdrawal face losing 6.25% of their own
savings. As a result, customers are left with less money than
they originally deposited.
Within this context, the Committee notes recent data which shows
a surge in withdrawal charges. In the 2023-24 financial year,
almost double the amount of people made an unauthorised
withdrawal (99,650) compared to the number of people who used
their LISA to buy a home (56,900). This should be considered a
possible indication that the product is not working as intended,
concludes the Committee.
Since its inception in 2017, 6% of adults who have ever been
eligible have opened a LISA with around 1.3 million accounts
still open, according to the most recent figures. The Office for
Budget Responsibility predicts spending on bonuses paid to
account holders will cost the Treasury around £3 billion over the
five years to 2029-30. The Committee questions whether this
product is the best use of public money given the current strain
on public finances.
MPs raise concerns that the product may not be well-targeted
towards those in need of financial support and could in fact be
subsidising the cost of a first home for wealthier people at a
significant cost to the taxpayer. As the data on this issue
remains unclear, the Committee urges the Treasury to measure and
publish how people on different income brackets are using the
product.
The report includes the Treasury Committee's support for certain
elements of the LISA, including its usefulness as an option for
the self-employed to save for retirement, the need for a
deterrent to prevent withdrawals for unauthorised reasons and the
property price cap which aims to direct financial support towards
those who need it most.
Chair of the Treasury Select Committee, Dame , said:
“The Committee is firmly behind the objectives of the Lifetime
ISA, which are to help those who need it onto the property ladder
and to help people save for retirement from an early age. The
question is whether the Lifetime ISA is the best way to spend
billions of pounds over several years to achieve those
goals.
“We know that the Government is looking at ISA reform imminently
which means this is the perfect time to assess if this is the
best way to help the people who need it.
“We are still awaiting further data that may shed some light on
who exactly the product is helping. What we already know, though,
is that the Lifetime ISA needs to be reformed before it can
genuinely be described as a market-leading savings product for
both prospective homebuyers and those who want to start saving
for their retirement at a young age.”
ENDS
Notes to editors:
· Former Chancellor introduced the LISA in the
2016 Budget, aiming to provide an alternative method of tax-free
saving for retirement while simultaneously encouraging people
under 40 to save for a property by offering incentives which
could help people get on to the property ladder.
· The product enables people
under 40 to open a LISA, and to contribute up to £4,000 each year
until they're 50. This is topped up by a 25% bonus from
HMRC.
