LISA0010
Written evidence submitted by Anonymous
I am young working professional and saw detail of the committee regarding the lifetime ISA and wished to outline my thoughts and opinions in the hope of helping the committee come to the conclusion that best suit all parties involved. I would like my submission to remain anonymous for the most part but I am happy to be contacted further if there is additional information needed:
Personal information:
xxxx:xxx
xxxxxx: xxxxxxx xxxxxx
Relevancy to LISA Committee: Young professional who will be looking to purchase their first home in the future. Currently holds a Help-to-buy ISA but will be opening a LISA to potentially benefit from its flexibility
1. Is the Lifetime ISA fit for purpose in its current design, including as a combined product for house purchase and pension saving?
Not wholly. For the most part yes, this is an incredibly effective product for both house purchasing and pension saving but there is one key drawback in my opinion and this being the limit to which the purchase price of a property can be. This being £450,000.00 irrespective of location of the property. For the most of the UK this presents no issue as a first time buyer is incredibly likely to be purchasing a house under that amount but in London or the South-East such as Brighton, that becomes a very real limit that can price out a first time buyer who is only able to purchase a property over that limit, but unable to then claim the relevant bonus associated with their LISA.
As a pension savings vehicle however, it is also flawed in nature. Personal contributions to a pension scheme attract pension relief, 20% for basic rate taxpayers and then 40% for higher rate taxpayers. (45% for additional rate but for relevancy of first-time buyers this would be a narrow set of individuals). The bonus for the LISA is 25% which means that when considering the 20% relief you would get for paying this into a pension, you only get an additional 5% as an incentive and that is only applicable for basic rate taxpayers, for higher rate taxpayers, they are effectively missing out on 15% tax relief that they would get when instead contributing to a personal pension. As such, I believe it is flawed as a pension saving vehicle.
2. How well do consumers transition between using the Lifetime ISA as a product for house purchase, to then a product for pension saving?
Poorly, the primary and majority of uses would be for a house purchase and that is how the product is marketed, not as a pension saving vehicle. By trying to focus on being two things at once, it falls short of being both.
3. Given its policy purposes, is the Lifetime ISA value for money for the Government?
Yes. It is an all-round benefit for the Government. The exact details are not published by the Government but the penalty on LISA withdrawals for non-house purchases is an effective way to cover the cost incurred by the bonuses issued to individuals.
Other benefits include the option for the monies to be invested in traditional funds and stocks, this means more money is invested in potentially UK companies which can help to drive growth in those areas.
There is also a distinct public benefit in getting more first time buyers on the housing ladder, it will promote young people starting families with firm foundations beneath them, I believe a lack of this in recent years has contributed to the pressures and concerns surrounding the current population growth and this falling below expectations, increasing the risk of an aging population.
4. Is the Lifetime ISA a suitable pension savings product?
No. Fundamentally as outlined earlier, it quickly becomes less tax efficient to contribute into a LISA.
Whilst the ability to access this early is seen as a benefit for flexibility, this is a weakness as a pension product, pension savings should not be able to be accessed until retirement and this encourages consumers to be able to access this sooner.
5. Should the Lifetime ISA be abolished?
No. it should be reformed to be solely a deposit boosting product. All other features such as the pension benefit should not be retained and should be considered as part of the Government’s pension reform, a similar pension product may well be suitable but it should be marketed as such and not rolled into this product with distinctly different goals and outcomes.
6. Should the Lifetime ISA be reformed to remove the withdrawal penalty?
No. The bonuses issued by the Government need to be funded somehow and this is a good trade off that enables the benefit to be passed onto consumers.
7. Should the Lifetime ISA be restricted to those with no access to a workplace pension?
No, as a workplace pension is not an appropriate alternative to assist those looking to save for their first house. A similar pension product that has the benefits of a LISA such as 25% tax-relief but no early withdrawal scope for those who do not have access to a workplace pension would be worth consideration.
8. Should the Lifetime ISA house price cap be raised in line with inflation, or removed?
I think this should be removed, the other constraints such as the consumer needing to be a first-time buyer, needing it to be a primary residence helps to constrict these purchases to those that are in genuine need of a first-home and the cap only acts currently to restrict the choice that a first-time buyer has.
The house price cap has also not increased since introduction by George Osborne despite considerable increase in house prices and inflation meaning the real value of the cap has fallen significantly over the period.
9. Should the annual Lifetime ISA limit be raised from £4,000?
No, when in conjunction with the removal of the price cap it should not be. Increasing both the cap and the ISA limit would result in more taking advantage of the LISA and its bonus whereas this is a strong middle ground that allows savers to build a strong bonus and deposit over a medium-term saving period of 5-7 years.
10. Should the Lifetime ISA be reformed in any other way?
I have alluded to this throughout the above questions, but the below points would best summarise the changes I believe are worth consideration:
- Keep reformed LISA contribution limit at £4,000.00 per annum.
- Abolish cap on house prices for reformed LISA.
- Remove ability to take the reformed LISA as a pension benefit.
- Introduce a new product that allows for the LISA to be taken as a pension benefit restricted to those who do not have access to a workplace pension scheme. This will be called the Lifetime Pension. This new product should not allow early encashments, even for a penalty. The Lifetime Pension should allow existing LISA holders the option to transfer their existing LISA into the Lifetime Pension or convert into the reformed LISA. This will also be available for those who also have workplace pension schemes but only if they held a LISA before the creation of the Lifetime Pension.
- The Lifetime Pension should be able to be transferred into a conventional defined contribution pension/personal pension/SIPP as an uncrystallised amount. This would attract no further tax relief when the transfer takes place and not be considered against an individual’s annual allowance, it would allow those who wish to simplify their affairs to be able to do so. It could not be taken advantage of as new Lifetime Pensions after the initial conversion option will only be able to be opened by those without access to a workplace pension scheme. Those in this narrow circumstance should be able to benefit from the slightly improved of what is now effectively tax-relief of 25%.
- Significantly increase penalty on the reformed LISA for when realising funds for anything other than a house purchase. This will further fund the bonuses issued by the Government, if consumers want to avoid the penalty, they have the initial opportunity to convert it into the Lifetime Pension, but they lose the ability to access this before their retirement date. This will only impact those who then did not intend to use the LISA for it’s intended purposes and want to realise it for other uses. The LISA should never have been used as an emergency cash pot for instance. There will be no cases of people taking the penalty due to the price cap of property purchases due to the removal of this cap in my proposal.
- Mandate the transferring of Help-to-buy ISAs into either the reformed LISA or the Lifetime Pension. This means those who want to save for a house must commit to doing so under the consideration of penalty if they do not, this is the trade-off for the bonus received. Those who do not wish to take on this risk can convert it to the Lifetime Pension, even if they have access to a workplace pension scheme as an option of flexibility.
December 2024