The future of Lifetime Isas hangs in the balance after an influential parliamentary report said they were overly complex, fail to support good financial decisions and are not ‘working as intended’, throwing into question whether they remain a good use of £3bn of Treasury funding.
This Treasury Select Committee report is calling for reform of these products as part of the government’s wider review into Isa savings.
This critical report also comes at a time when there have been growing calls to look again at whether the pensions system, particularly through AE can be used to help people only the housing ladder, not least to help avoid people have to pay rent in retirement.
This TSC report specifically highlighted concerns that Lisas unfairly penalise customers through their early exit changes, which not only claw back the government bonus but reduce savers’ contributions by 6.25 per cent. These are imposed if people withdraw their money before the age of 60 for any purpose other than buying a first property.
The TSC found that in the 2023/ 24 tax year more than twice as many people made an unauthorised withdrawals from their Lisa than used these savings to help fund a property purchase. It said this is an indication that the product is not working as intended.
The TSC found that since its inception 6 per cent of adults who have ever been eligible have opened a Lisa with around 1.3 million accounts still open. The Office for Budget Responsibility predicts spending on bonuses paid to account holders will cost the Treasury around £3bn 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 were also highly critical of the way that Lisas interact with the benefit system. They pointed out that Lisa savings can affect eligibility for Universal Credit or Housing Benefit, despite this not being the case for other personal or workplace pension schemes. The report described this anomaly as “nonsensical.”
Lisas have been around since 2017, and allow those under 40 to save for both their first house purchase and later retirement. But the TSC said that the complexity around longer- and shorter-term objectives can result in savers choosing unsuitable investment strategies.
It says that cash options 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.
MPs also highlighted the fact that the Lisa 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 urged the Treasury to measure and publish how people on different income brackets are using the product.
Although there were numerous criticisms as to how Lisas work in practice the TSC report said there was support for for certain elements of the LISA, including its usefulness as an option for the self-employed to save for retirement.
There has been criticisms elsewhere about the property price cap, meaning Lisa savings can only be accessed penalty-free to purchase a property costing up to £250,000 (or £450,000 in London). Critics point out these limits have not moved since 2017, despite rampant house price inflation over this period. However the TSC said it supported the principle of property price cap which aims to direct financial support to hose who need it most.
Commenting on the report TSC chair Dame Meg Hillier says: “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.”
