LISA0130
Written evidence submitted by Anonymous
I am writing as an individual consumer. I am contributing to your assessment as although I have a pension rather than a LISA, my wife does have a LISA and she finds it a useful and simple way to save for the future.
Background
The Treasury Committee is asking for evidence on whether the Lifetime Individual Savings Account (LISA) is still an appropriate financial product nine years after it was created.
Former Chancellor George Osborne introduced the LISA in the 2016 Budget, aiming to provide an alternative method of tax-free saving for retirement while simultaneously encouraging people under 40 to save for a property by offering incentives which could help people get on to the property ladder.
The product enables people under 40 to open a LISA, and to contribute up to £4,000 each year until they’re 50. At the end of each tax year, this is topped up by a 25% bonus from HMRC.
Individuals are only able to withdraw their money from the account if they are either buying their first home, terminally ill with less than 12 months to live or aged 60 and over. Withdrawal for any other reason comes with a 25% charge.
The Treasury Committee is aiming to gather views from the finance industry, consumers and experts. As part of this work, MPs are looking for answers to the following questions:
Questions and Answers
1. Is the Lifetime ISA fit for purpose in its current design, including as a combined product for house purchase and pension saving?
Yes, though certain features should be adjusted to improve the product, namely (a) School-boy maths tells us that adding 25% to a number and then taking 25% from the resulting number does not bring us back to the original number. If a penalty is needed it should be a maximum of 20% (to bring us back to the original number) otherwise people faced with one of the many financial situations that crop up through life and who then need cash quickly will find themselves with a loss of capital. This potential outcome is one of the reasons the product itself has faced subdued popularity. (b) The requirement that the house purchase be a first house and valued under £450K is irrational. I own a two bedroomed-house but with four children we need somewhere bigger but can’t use my wife’s LISA to help finance this because of these two restrictions. (c) Limiting the start point for the product to people under 40 is unnecessary as people under this age are often scrambling around for spare cash and have very fluid plans. (d) Likewise, having a cutoff for paying into the LISA at 50 makes no sense either. (e) The age limit of 60 for pension use should be aligned with other pension products i.e. 55. (f) The amount that can be saved should be edged upward from the current £4,000 limit. Making these adjustments would improve LISAs and make them more popular.
2. How well do consumers transition between using the Lifetime ISA as a product for house purchase, to then a product for pension saving?
This really is the key reason you should try to improve these products by removing the restrictions and penalties I have itemised above. People are not born with a fully developed financial sense. The transition through the financial landscape from their first bank account to a savings account, then to a Cash ISA, followed by a Stocks and Shares ISA through the LISA, finally arriving at a pension should be assisted as much as possible. Together, these products represent a relatively gentle slope with a progression of increasingly complexity and increasing long-term thinking. LISAs, albeit imperfectly formulated, are a key stepping stone to helping people along this path. Pensions themselves are surrounded by complex restrictions and hidden costs and, in my experience, can be used by advisers and providers in ways that are against the interest of consumers. I lost a material amount of money when the provider of my first pension insisted that I take advice before moving my pension away from their expensive fee structure to another provider. They were able to do this because of the pension had a relic feature that fell outside the normal money purchase dimensions. All reasonable actions on my part were blocked by the advice requirement which they knew would be prohibitively expensive and they would only waive the requirement for advice if I agreed to buy a worthless annuity from them (this was when annuity rates were at their lowest point). The requirement for mandatory advice was also used to hinder my exit from another scheme. The adviser told me at great length and expense how inflation would stay close to 2% (!), how the current scheme was financially sound (it was not), how annuity rates would stay low indefinitely (!) and finally how even though his modelling predicted that in 99.9% of future worlds I would benefit from moving my monies he couldn’t possibly recommend that I should do so (because then he would become liable for the quality of his advice). My point is that pensions are very complex and the scope for the professionals to misuse the rules and consumer protections to enrich themselves is a real problem. They do not like LISAs and generally do not promote them because you can write down the rules on a post-it note. This simplicity makes them gold in my view. They can be improved of course and this would help people move along and up the path of financial learning.
3. Given its policy purposes, is the Lifetime ISA value for money for the Government?
Having a well-informed public able and willing to make financial provision for themselves with easy access to a range of flexible financial products is a national good. Removing LISAs would just create a gap. They are cheaper for the government and simpler/more accessible for the consumer than pensions so of course that makes them value for money.
4. Is the Lifetime ISA a suitable pension savings product?
Yes, they are perfect for those who are doubtful about pensions and need something easy to understand, noting the adjustments suggested above.
5. Should the Lifetime ISA be abolished?
No, they should be improved.
6. Should the Lifetime ISA be reformed to remove the withdrawal penalty?
The size of the penalty is wrong (see above) and serves only to discourage use of LISAs.
7. Should the Lifetime ISA be restricted to those with no access to a workplace pension?
A pointless complexity – keep them simple and simplify more where possible.
8. Should the Lifetime ISA house price cap be raised in line with inflation, or removed?
Removed – how can a product feature restricting the product’s usefulness geographically and practically be a good thing?
9. Should the annual Lifetime ISA limit be raised from £4,000?
Yes – move upwards to keep the product useful and relevant.
10. Should the Lifetime ISA be reformed in any other way?
See suggestions in answer to Q1 above. Most importantly, be very wary of any suggestions coming from the professionals whose interests don’t always align with the consumers you need to support.
January 2025