The Lifetime ISA (LISA) has come under fire from MPs, with a Treasury Select Committee report warning that the product’s design may be leading consumers to make poor financial decisions.
The LISA was introduced in 2017 and allows under-40s to save up to £4,000 per year towards their first home or retirement, receiving a 25% government bonus on contributions.
The dual-purpose product has been criticised by MPs for instead potentially diverting savers from more suitable products.
For example, the committee said that cash LISAs may benefit first-time buyers but are ill-suited for retirement saving, as they are unable to invest in higher-risk but potentially higher-return products such as bonds and equities.
In addition, the report warned that the LISA may have been mis-sold to benefit claimants, as funds held in these products can reduce an individual’s eligibility for Universal Credit or Housing Benefit. As such, the committee has asked the Treasury to measure and publish how people on different income brackets are using the product.
The LISA’s 25% withdrawal penalty also came under fire. The charge not only claws back the government-issued bonus but also takes 6.25% of the saver’s own money – meaning they are worse off when making an unplanned withdrawal.
According to the committee, there were nearly twice as many unauthorised withdrawals in 2023-24 (99,650) as home purchases (56,900).
Public spend is also of concern to MPs, with the Office for Budget Responsibility estimating the LISA will cost the Treasury around £3bn over the next five years for 1.3 million open accounts.
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.”
Time for a change?
The report has prompted a wave of reaction from the industry, with advisers and policy experts calling for urgent reform.
Tom Selby, director of public policy at AJ Bell, said the LISA is a “fantastic” savings and investment product when used correctly, but added that it features design flaws which “need to be ironed out”.
He said: “Even the best-laid plans often go awry and it is unfair to punish people with an exit charge that goes beyond simply recovering the government-funded bonus.”
Selby suggested reverting to the system in use during the pandemic, when the penalty only matched the original bonus received on the amount.
Rachael Griffin, tax and financial planning expert at Quilter, pointed out that the LISA’s £450,000 property price cap no longer reflects the reality of the UK housing market.
“Many who have saved diligently find they cannot use their LISA for the property they need without facing a financial penalty,” she said. “This undermines confidence in the product and adds to its complexity.”
The ISA framework more broadly needs to be reformed and simplified to encourage more of a “culture of investment”, according to Richard Stone, chief executive of the Association of Investment Companies (AIC).
“This is vital to help ensure increased financial resilience and wealth, as well as making sure the regime delivers value for money for taxpayers,” he said.
“We share many of the concerns raised in the Treasury committee’s report and agree that the dual purpose of the LISA could lead consumers to make poor asset allocation decisions.”