LISA0032

Written evidence submitted by Anonymous

My response is based on my interest in this issue a consumer using this tax wrapper. I have no professional background in finance, however, changes to the LISA system would directly affect me. I will answer the questions in this ‘call for evidence’ sequentially and briefly. 

1. Is the Lifetime ISA fit for purpose in its current design, including as a combined product for house purchase and pension saving?

The LISA is more useful for pension savings than a house purchase in its current form. There are two reasons for this. 1/ House prices have risen so much since the LISAs introduction that the £450,000 cap limits a substantial number of people from using a LISA to buy a house with. 2/ The tax-free nature of the LISA combined with the 25% government boost makes it much more attractive for use as a pension, as it is not taxed as income on withdrawal (as a pension is). This is especially true of younger people (due to the amount of time investments have to compound) and of those paying basic rate income tax (20%) as the 25% government contribution in a LISA is more than the tax relieve they would get in a SIPP or a workplace pension. In conclusion, it is fit for purpose for pension savings but not for house purchases.

2. How well do consumers transition between using the Lifetime ISA as a product for house purchase, to then a product for pension saving?

I do not have any statistics for this; although providers will be able to give you an idea, I am sure. However, having researched this in the past, it seems like the government/ providers could be clearer in stating that you can use a LISA for both of these purposes as a not insignificant number of people using these accounts believe that it is an either/or scenario.

3. Given its policy purposes, is the Lifetime ISA value for money for the Government?

Considering the massive pensions ‘gap’ that we have in the UK, coupled with the housing crisis and suspended adulthood that young people are experiencing due to house prices being unaffordable I think it is in the government’s interest to continue the LISA; although it will never be a substitute for building more houses and an increase in the house price cap is desperately needed.

4. Is the Lifetime ISA a suitable pension savings product?

The LISA is an incredibly powerful pension savings tool; with my key concern in this area being that the government or a future government will ‘shift the goal posts’ with regard to LISAs for retirement and tax them/cap their value. If someone were to contribute £4,000 a year to a LISA from age 18 to 50 (when contributions have to cease under current rules) and then withdrew at 65 for retirement; with the government match and a 5% after inflation return, the account would be worth approx. £740,000 (assuming 0.25% fees) in today’s money. That is a very substantial chunk of money that is ‘outside’ of the normal pension system, and could be taken as a lump sum, in one go without a penny being paid in tax. This is great news for consumers but it would also represent a tempting option for a tax grab by a future Chancellor.

5. Should the Lifetime ISA be abolished?

No. People are trying to plan for their whole lifetimes and the LISA is only 9 years old.

6. Should the Lifetime ISA be reformed to remove the withdrawal penalty?

In theory, the withdrawal penalty promotes favourable behaviour. It also means the government isn’t giving away free money without that favourable behaviour occurring. However, it does seem harsh to leave people worse off than when they started just because their circumstances have changed. A more sensible approach would be a ‘no worse off’ policy, where no government bonus is allowed to be taken out early but it is not possible to take out less than you put in. This, in practice, would look something like a 20% withdrawal penalty.

7. Should the Lifetime ISA be restricted to those with no access to a workplace pension?

No, not if you want people to buy a house with it. SIPPs exist as a solution to the problem of people having no workplace pension.

8. Should the Lifetime ISA house price cap be raised in line with inflation, or removed?

Yes; it is absolutely ridiculous that LISA allowances have not be raised with house price (not just CPI/RPI) inflation. The goal posts need to be consistent in real terms.

9. Should the annual Lifetime ISA limit be raised from £4,000?

Yes. Again, £4,000 in 2016 is worth a lot more than £4,000 in 2025. Allowances should be increased with some form of inflation. If a student loan repayments go up at RPI + 3%, old people’s state pensions are triple locked but the LISA house price cap and LISA annual allowance do not increase at all for 9 years it is hard not to feel like successive governments are systematically disadvantaging young people.

10. Should the Lifetime ISA be reformed in any other way?

Yes. 1/ The term ‘individual savings accounts’ implies that these accounts are for cash savings; however, the tax-free nature of them really makes them ideal for investing. It would be a substantial rebrand, but perhaps a new name which reflects the true usefulness of these tax wrappers? Perhaps, Personal Investing Accounts (PIAs?).

2/ The 50 year old age cap no inputting into a LISA seems arbitrary. Imagine if you couldn’t put money into a pension past 50! It should be abolished.

January 2025