LISA0013
Written evidence submitted by Anonymous
1. Is the Lifetime ISA fit for purpose in its current design, including as a combined product for house purchase and pension saving?
Lifetime ISA (LISA as it is popularly known) is a great investment tool, specially for young persons getting on to saving for their future, either to get on to the property ladder as First Time Buyer or to save for their retirement. As a combined product, there is flexibility and the bonus element acts as sufficient incentive for young people to start saving who typically move from LISA to ISA and eventually SIPP and other products.
I encouraged both my children to start saving via LISA as soon as they turned 18. Both of them are now contributing full annual allowance to LISA and ISA and my son, who is 25, is also opening a SIPP account soon. I have also encouraged friends and family children to start investing via LISA as soon as they turned 18.
The product is however a bit misunderstood and needs reform. I will make those suggestions as part of your last question number 10.
2. How well do consumers transition between using the Lifetime ISA as a product for house purchase, to then a product for pension saving?
The flexibility of LISA to be used either for house purchase or pension makes the product flexible and attractive. It has the potential to encourage young people to transition from LISA to ISA and to pension, encouraging the culture of saving for the future.
3. Given its policy purposes, is the Lifetime ISA value for money for the Government?
By keeping, the government is encouraging young people to start with investments and savings. The bonus provided is no different from basic rate tax relief on pension contributions but flexibility to withdraw for the purpose of home purchase remains an attractive option. This allows people to start investing early on, thereby developing the culture for saving for the future and in longer term reducing dependence on state support.
4. Is the Lifetime ISA a suitable pension savings product?
Yes, in fact it is a great flexible product where savings can be used for home purchase or pension, providing the young people with encouragement to start saving. If it was simply a pension product like SIPP, there would be friction and inertia in the young people who tend to consider retirement a far off destination and postpone investing for the future. Introducing flexibility in LISA overcomes this friction.
5. Should the Lifetime ISA be abolished?
No, instead it should be reformed to make it attractive. One of my suggestions is to merge ISA and LISA as one product called LISA, retaining the element of Government bonus of 25% (capped to £1,000 annually if so required) and early withdrawal penalty of 20% (instead of 25% today). This would single handedly simplify the offering, make the product extremely attractive to young people and would encourage the culture of saving for the future.
6. Should the Lifetime ISA be reformed to remove the withdrawal penalty?
This would make the product super attractive to young people and make the product the first choice for young people to step onto the culture for saving and investing. If this can be done, it would be my first preference. However to correct the anomaly existing today, the penalty rate needs to be changed to 20% instead of 25% today. The correct mathematical figure to recover the government contributed bonus (and its growth) for early withdrawal is 20%.
(£4,000 + £1,000)*20% = £1,000
7. Should the Lifetime ISA be restricted to those with no access to a workplace pension?
The beauty of LISA is that it is flexible. The purpose of reforming it should be to increase the flexibility instead of restricting it. Workplace pensions are an additional saving tool and contributions to work place pensions are usually limited to a % of annual salary which may not be equivalent to £4,000 per year specially in the early year. Also workplace pension cannot be accessed for home purchase nor can early withdrawals are permitted for emergencies. It would be a really bad idea to link LISA eligibility to the workplace or any other pension product. I would advocate that the government, instead of putting restrictions, should improve the flexibility and promote the product as government support (via bonus) to encourage people to save for their future.
8. Should the Lifetime ISA house price cap be raised in line with inflation, or removed?
The house price limit for LISA is an unnecessary restriction and should be removed entirely. If not, it should at least rise in line with the house price index annually with suitable one time adjustments to the current limit of £450,000.
9. Should the annual Lifetime ISA limit be raised from £4,000?
LISA limit should be same as ISA limit (i.e. £20,000 annually). The government can decide to continue to provide a full 25% bonus on the entire £20,000 or can restrict it to a maximum £1,000 as done today.
10. Should the Lifetime ISA be reformed in any other way?
Here are my suggestions for reform for your consideration:
A. Merge LISA and ISA as a single account with £20,000 annual contribution limit. Call this product LISA. “Lifetime” has a nice ring to it.
B. This account (called LISA) would benefit from a government bonus contribution (25% on amount contributed or can be restricted to £1,000 maximum per year) provided the saver is of age 18 to 50 (as today). The bonus contribution will stop after the age of 50.
C. The investor can use the savings to purchase a home in the UK. Restriction on it being a first home should be removed. This would encourage savers to continue saving for upscaling their home when they get married, have family and want a bigger home. The limit on house price should also be removed (or raised in line with house price index annually). Make it flexible.
D. Ideally there should be no withdrawal penalty however if the government wishes to restrict the withdrawal only for home purchase or pension, withdrawal for any other purpose before age of 60 could have a 20% penalty instead of 25%. This would remove the anomaly that in some cases investors would lose from their own contribution. E.g. if investor invests £4,000 and the government provides 25% bonus i.e. £1,000, in case of early withdrawal, to recover the £1,000 the government needs to apply a 20% (not 25%) penalty. 20% of (£4,000 + £1,000) = £1,000.
December 2024