MPs found that the LISA’s objectives to help people save for both the short term (buying a first home) and long term (retirement) makes it more likely consumers will choose unsuitable investment strategies.
The report also noted several other issues with LISAs, many of which have previously been raised by various financial experts calling for ISA reform over the past few years.
Penalising benefits claimants
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 described these rules as “nonsensical” and concluded 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.
Withdrawal fees
Another issue raised by the committee was the 25% charge for withdrawing funds due to unforeseen circumstances.
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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.
The committee referenced recent data that shows a surge in withdrawal charges. In the 2023/24 financial year, almost double the number of people made an unauthorised withdrawal (99,650) compared to the number of people who used their LISA to buy a home (56,900).
Savers are also penalised if they use their ISA savings to buy a property worth more than the £450,000 threshold.
Martin Lewis, founder of MoneySavingExpert.com, said: “Lifetime ISAs have worked well for many, but there is a growing hole that needs urgently addressing. No first-time buyer should be penalised for accessing their LISA savings to buy their first property – as that’s what the state, and the marketing, encourages them to do.
“Yet that’s what happens when young people, priced out by inflation, try to use their LISA savings for a home above the £450,000 threshold (which hasn’t moved since LISAs launched in 2017) – as is getting more common in the SE of England. It’s understandable that they don’t get the 25% bonus, but they are effectively fined 6.25% of their money (so £625 per £10,000 saved) to withdraw it. This is unfair, unjust and the rules need changing. If a LISA is used to buy a property above the threshold, there… should be no fine, they should get back at least what they put in.”
Strain on public finances
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 (OBR) predicts spending on bonuses paid to account holders will cost the Treasury around £3bn over the five years to 2029/30. The committee questioned whether this product is the best use of public money, given the current strain on public finances.
Dame Meg Hillier, chair of the Treasury Select Committee, 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.”
Age limits
Investment platform AJ Bell is calling for the age restrictions on LISAs to be relaxed. Under current rules, savers can only open an account up until the age of 40, with Government contributions continuing until 50.
Tom Selby, director of public policy at AJ Bell, said: “The Lifetime ISA is something of a hybrid between a pension and an ISA, with some age-related constraints on both contributions and withdrawals – Government bonuses on contributions only apply up to age 50 and you cannot make a withdrawal until age 60, unless using the savings to buy a first home. There’s some logic behind that approach, but preventing people from opening an account once they reach age 40 seems an unnecessary restriction.
“Many people choose to supercharge their savings plans in the middle and latter stages of their career and Lifetime ISAs are an especially convenient retirement saving option for self-employed workers in particular. Removing the age limit [that] restricts new accounts only to those age 18-39 would help more people take advantage of the scheme.”
