While the Lifetime ISA (LISA) is a popular savings vehicle it requires reform due its dual nature of a savings vehicle for first home buyers and also as long term pensions saving, commentators argue.
This week HMRC published its ‘Understanding the Use of the Lifetime ISA’ report, which “lays bare the confusion at the heart of one of the government’s flagship savings products,” says Shaun Moore, tax and financial planning expert at Quilter.
“From a policy perspective, the Lifetime ISA is trying to be too many things at once. It is a hybrid house deposit account and retirement vehicle wrapped up in ISA branding. People are much more likely to understand the product if it has one clear purpose: to get on the housing ladder. To improve transparency and engagement, we believe the government should simplify the product and rebrand it as a ‘First Home Account’. This would reflect how it’s used in practice and help rebuild trust among the very savers it was designed to support.
Rachael Griffin, tax and financial planning expert at Quilter, added: “It’s clear that the product is failing to deliver as intended. From our experience with clients, we regularly see confusion over its dual-purpose design, which tries to combine retirement saving with support for first-time homebuyers. This lack of clarity undermines its effectiveness, leaving many consumers unsure how best to use it.
The Lifetime ISA is far better suited as a ‘First Homes Account’. Repositioning it this way would focus its purpose on helping people save for their first property, while removing the confusion around its role as a retirement savings vehicle. For those looking to save for retirement, existing workplace pensions and personal pensions are much more effective, structured, and tax-efficient options.”
Griffin added that the current age cap of 39 is outdated “given that first-time buyers now average 34 years old, with Londoners typically even older. Combined with the fixed £450,000 property price cap, which no longer reflects today’s housing market, it’s clear that the Lifetime ISA needs significant reform to remain relevant and supportive for those it was designed to help.
“The product as a whole should not be scrapped, but its scope should be narrowed so that it is better understood and utilised.”
Griffin said the LISA was “further hampered by an excessive 25% withdrawal penalty, which unfairly reduces savers’ contributions alongside reclaiming the government bonus.”
Moore added that a striking fact from the HMRC report was that “even financially literate savers, including those actively contributing to their LISA, did not realise that the 25% penalty on non-qualifying withdrawals can leave them with less than they originally invested. People simply do not realise it’s not just a clawback of the government bonus – it’s a loss on their own money.
“Once participants in the research understood this, there was broad consensus that the current rules feel unfair. Many supported a reduction of the withdrawal charge to 20%, which would at least allow savers to break even if circumstances forced them to dip into their pot. This sentiment was particularly strong among lower-income ‘Irregular’ and ‘Cushioned Savers’, who felt they were being penalised for financial instability rather than poor planning.”
Brian Byrnes, Head of Personal Finance at Moneybox said that the HMRC report showed the success of the LISA in helping people,e get on the property ladder. “That 56,900 account holders withdrew from their LISA to purchase their first property in 2023 to 2024 is a testament to its success. Furthermore, the figures show that LISA savers are depositing significantly more money into their LISAs, +43% year-on-year to £2.4 billion (2022 – 2023, most recent available HMRC data).
“At Moneybox, our data also shows that the LISA is more popular than ever, with a 32% year on year increase in the number of new customers opening a LISA in the first half of 2024. The average age of customers opening a LISA has also decreased from 29 to 26, proving that the LISA is also encouraging young people to start saving for this important life goal earlier in life. With such strong demand for the LISA, we believe that now is the time to future proof this incentivised savings product to ensure it continues to provide such invaluable support to young people.
“Moneybox is actively calling on the government to review the price cap regularly to enable the product to keep pace with property price growth. We are also proposing a more flexible approach to the withdrawal penalty currently imposed to support people who are working hard to invest in their futures.
“As part of our upcoming Voice of First Time buyers report, we surveyed Moneybox savers on their views on the LISA, with 92% agreeing that it was effective in helping them reach their goals. 81% of LISA savers report that they found saving regularly easy compared with 67% across all FTBs surveyed, highlighting how effective the LISA is at helping people build and embed positive saving habits in life.”
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