The Government has failed to heed warnings that the Lifetime Isa is a “confused product” in need of reform, says the Treasury Committee.
In a previous report, the cross-party group of MPs said it was unconvinced that the LISA effectively targets people in genuine need of financial support, criticising its complexity and highlighting that reforms to the early withdrawal charge and maximum property purchase price could boost their appeal. However, it said the Government has not taken the opportunity to set out a plan for reform.
LISAs, launched in 2017, are aimed at people aged between 18-39 saving for a first home or retirement. Savers can put up to £4,000 each year into a LISA until they are age 50, with the Government adding a 25% bonus of up to £1,000 a year.
However, the Committee has called for LISA savings to be treated in the same way as other pension savings in relation to the Universal Credit means test. In the absence of such reform, it argues that LISAs should be labelled as an inferior product and include warnings that they may disadvantage anyone who might one day claim Universal Credit.
MPs also warned that the LISA’s dual purpose design may be diverting people away from more suitable products and putting part of their savings at risk.
While the Government has committed to working with LISA providers to improve messaging around the product, it has not set out what that would look like in practice.
Chair of the Treasury Select Dame Meg Hillier said: “The Government has taken some steps towards improving the Lifetime ISA, but I do not believe they have gone far enough. The Lifetime ISA is a confused product that requires reform.
“Recently published research by HMRC based on a sample of LISA holders found that 87% of those who had used their LISA to buy their first home said that they could have done so without their LISA. Given that the LISA is forecast to cost the Government £3 billion over the next five years, this raises the question whether the LISA is a good use of taxpayers’ money.
“The Government has an opportunity at the Budget to think again on the LISA for would-be first-time buyers and those saving for retirement alike.”
Rachel Vahey, head of public policy at AJ Bell, said: “Rather than a ‘wait and see’ response, the Treasury Committee wanted to see action and a plan for reform put in place. But the Government has thwarted those wishes.
“HMRC’s recent research showed that Lifetime ISA customers gave the tax wrapper a resounding thumbs up, helping many realise their housing dreams. But the product is not without its flaws.
“AJ Bell has long campaigned for reducing the punitive early withdrawal penalty. 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. Reverting to the system used during the pandemic, when the penalty only matched the original bonus received on the account, would be a fairer approach.”
Vahey points out that while ISAs remain popular, political tinkering means a “patchwork quilt of products” has been stitched together over time and the existence of the LISA alongside Help to Buy ISAs illustrates how complex the landscape has become.
“Research supported by AJ Bell shows that when faced with excess complexity, people often choose the path of least resistance in the form of cash saving. Removing complexity could play a crucial role in smashing the psychological and material barriers between saving and investing.
“Simplifying the ISA landscape, including the Lifetime ISA, would make it easier for people to identify the right product for their needs and put an end to what many consumers see as an either/or choice between cash savings and investments,” Vahey added.
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