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Don’t scrap the LISA, simplify it, says LEBC

7 August 2018

LEBC Group has warned that a generation of young savers struggling to buy their first home will be hit if the government scraps the Lifetime ISA.

Following the recommendation put forward in the recent Treasury Select Committee’s ‘Household finances: income, savings and debt’ report that the Lifetime ISA should be abolished, LEBC has said that instead the government should focus on simplifying it.

Kay Ingram, director of public policy LEBC, commented: “The Committee is right to highlight the complexities of the LISA, which unfairly penalises savers for withdrawing cash which is not then used specifically for the purchase of a home – but a relatively simple reform is all that is required, not outright abolition of the scheme.”

The Lifetime ISA was designed to help first time buyers save for a deposit and replaced the ‘Help to Buy ISA’. It allows those aged 18 to 40 to open a savings account, with up to £4,000 a year. The government tops this up with 25%, to a maximum of £1,000 per tax year. Currently, cash withdrawals which are not used to buy a home incur a 25% penalty on the whole withdrawal, enabling the government to claw back more than its subsidy and the growth on it.

Savers who choose not to use their Lifetime ISA for a property can avoid this tax by not touching their savings pot until they reach 60, when they are entitled to make tax-free withdrawals. However, critics have lambasted this rule for causing confusion with pensions, and it has deterred some providers from offering the product altogether over fears of mis-selling.

LEBC believes technology already being used among private pensions to earmark the contributions of members and employers into separate pots could help to overcome the complexities in the scheme. By using this approach, the Lifetime ISA could separate individual and government contributions and the clawback for non-house purchase withdrawals could be restricted to the pot built up by the taxpayer subsidy.

Ingram added: “All too often we hear of young people giving up on the ambition of buying their own home, because it seems impossible to achieve. Taking away the one scheme designed to help them achieve this goal risks alienating them from the savings culture forever. The LISA needs simplification, not scrapping.”