‘Complex’ Lifetime ISA increases risk of poor financial decisions

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MPs found that the LISA’s objectives to help people save for both the short and long term makes it more likely consumers will choose unsuitable investment strategies. Cash LISAs may suit those saving for a first home but may not achieve the best outcome for those using it as a retirement savings product, as they are unable to invest in higher risk but potentially higher return products such as bonds and equities. 

In its report, the Committee describe current rules which penalise benefit claimants as ‘nonsensical’ and concludes that it is possible that LISAs have been mis-sold to people who are eligible for Universal Credit or Housing Benefit now or in the future.  

Under the current system, any savings held in a LISA can affect eligibility for Universal Credit or Housing Benefit despite this not being the case for other personal or workplace pension schemes. The Committee determines that, if this isn’t changed, the LISA should be clearly labelled as an inferior product to those who may at any point in their life be eligible for such benefits. 

Another issue raised by the Committee is the 25% charge for withdrawing funds due to unforeseen circumstances. This charge means that, as well as losing their bonus, LISA holders who need to make an unplanned withdrawal face losing 6.25% of their own savings. As a result, customers are left with less money than they originally deposited.  

Within this context, the Committee notes recent data which shows a surge in withdrawal charges. In the 2023-24 financial year, almost double the amount of people made an unauthorised withdrawal (99,650) compared to the number of people who used their LISA to buy a home (56,900). This should be considered a possible indication that the product is not working as intended, concludes the Committee. 

Since its inception in 2017, 6% of adults who have ever been eligible have opened a LISA with around 1.3 million accounts still open, according to the most recent figures. The Office for Budget Responsibility predicts spending on bonuses paid to account holders will cost the Treasury around £3 billion over the five years to 2029-30. The Committee questions whether this product is the best use of public money given the current strain on public finances. 

MPs raise concerns that the product may not be well-targeted towards those in need of financial support and could in fact be subsidising the cost of a first home for wealthier people at a significant cost to the taxpayer. As the data on this issue remains unclear, the Committee urges the Treasury to measure and publish how people on different income brackets are using the product. 

The report includes the Treasury Committee’s support for certain elements of the LISA, including its usefulness as an option for the self-employed to save for retirement, the need for a deterrent to prevent withdrawals for unauthorised reasons and the property price cap which aims to direct financial support towards those who need it most. 

Chair comment

Chair of the Treasury Select Committee, Dame Meg Hillier, 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. 

“We know that the Government is looking at ISA reform imminently which means this is the perfect time to assess if this is the best way to help the people who need it.  

“We are still awaiting further data that may shed some light on who exactly the product is helping. What we already know, though, is that the Lifetime ISA needs to be reformed before it can genuinely be described as a market-leading savings product for both prospective homebuyers and those who want to start saving for their retirement at a young age.” 

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