The Treasury Committee has launched a review of the Lifetime ISA to see if it remains fit for purpose nine years after its creation.
The LISA was introduced in the 2016 Budget by former Chancellor George Osborne with the aim of providing an alternative method of tax-free saving for retirement, while simultaneously encouraging people to save for a property by offering incentives which could help people get on the property ladder.
Currently, LISAs are only available to those under 40 and allows them to contribute up to £4,000 each year until they’re 50. At the end of each tax year, savings are topped up with a 25% bonus from HMRC.
Individuals can only withdraw their money if they are either buying their first home, terminally ill with less than 12 months to live or aged 60 and over, with withdrawal for any other reason incurring a 25% charge.
In its call for evidence, the Treasury Committee is aiming to gather views from the finance industry on how well the LISA works and whether it is still fit for purpose in its current design. This involves looking at how well consumers transition between using the LISA as a product for house purchase to a product for pension saving and whether it is a suitable pension savings product.
The review will also look at the current rules and regulations, including exploring whether the withdrawal penalty should be removed; whether the LISA should be restricted to those with no access to a workplace pension and whether the LISA house price cap should be raised in line with inflation or removed.
The Committee is also asking for feedback on whether the annual LISA limit be raised from £4,000 or whether the product should be abolished altogether.
Respondents have until 4 February to submit their views.
Tom Selby, director of public policy at AJ Bell, said the review offers a “good opportunity” to address some of the issues with the LISA design as well as exploring where the LISA fits in a simplified ISA landscape.
Selby said: “AJ Bell has long campaigned for an end to the punitive early withdrawal penalty, instead reverting to the system used during the pandemic when the penalty only matched the original bonus received on the account. Likewise, raising the property purchase price limit, which has remained fixed since the Lifetime ISA was introduced, would be an obvious quick win.
“Crucially, the Treasury Committee’s findings should be a useful building block that informs the government’s plan to simplify the ISA system. Labour’s plan for financial services published in January 2024 pledged to simplify the ISA landscape, making it easier for people to save and invest and boost uptake of Stocks and Shares ISAs.”
Selby said that over the longer term, the government should consider whether the best features of the current ISA regime can be combined into a single ISA product.
“Precisely where the Lifetime ISA fits within that landscape is up for discussion. But the long-term focus must be in simplifying the ISA system, reducing undue complexity and making it easier for people to identify the right product for them, without funnelling people into what feels to many like an either/or choice between cash savings and investments.
“The benefits of simplification for consumers and the UK economy could be substantial. In particular, merging Cash ISAs and Stocks and Shares ISAs, the two most popular ISA products in the UK, would make it easier for those holding money in Cash ISAs to transition towards long-term investing,” Selby added.
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