LISA0140
Written evidence submitted by Anonymous
I am writing today in response to the recent call for evidence with regards to Lifetime ISAs, as they are a product I have some experience of using both for retirement savings and for a first home purchase from the perspective of a consumer. My wife xxxxxxxx and I have both gone from opening LISA accounts to closing them for good within the last 5 years – with one of us getting to keep the bonus and one of us losing it.
I first helped to set up a Lifetime ISA for xxxxxxxx in 2019, as she was still a first time buyer whilst I was in the process of buying a house in my sole name but which would be our home together. For various reasons it was not possible to add her to the mortgage at the time, so it seemed sensible instead to maximise her Lifetime ISA until such time as she could be added with a transfer of equity later. Technical guidance published in 2018 made it clear that my ownership of the property would not preclude this as she would still be a first time buyer.
I then later set up my own Lifetime ISA in 2021 as an adjunct to my existing pension savings, with the appeal being that the entire amount would then be available tax free from 60 rather than only 25% from 57.
Since then xxxxxxxx Lifetime ISA has reached a value of around £35,000 through a combination of investment returns and cash interest (we started off investing in a S&S LISA before later moving it to cash) and this month managed to complete a transfer of equity which saw her effectively buy into the house I had purchased in 2019. I would like to comment here that this process proved to be unnecessarily challenging, as there appears to be an incredible degree of ignorance on the part of both mortgage lenders and conveyancing solicitors as to how the product actually works. We were told by multiple firms that what we wanted to do was not allowed under the LISA rules, and only after threatening to escalate a complaint to the Financial Ombudsman Service was the current lender finally willing to look at the technical guidance we were citing and ultimately agree to proceed.
In terms of my own LISA however, I ultimately chose to withdraw the money I had paid into this and pay the penalty charge in order to transfer it into my SIPP instead. My reasons for doing this boil down to insecurity around my job and a risk that I may end up needing to claim means-tested benefits within the next few years. It is a not insubstantial quirk of the current system that money set aside for retirement in what is ostensibly a retirement savings vehicle is instead treated as cash savings if one later needs to access state support, whereas money in a true pension is disregarded. The current model also means that people are incentivised to withdraw as early as possible if there is any risk of this becoming an issue, because the penalty rises proportionally with the value of the account.
In answer to the questions posed by the call for evidence I therefore offer the following responses:
1. In my opinion the Lifetime ISA is fit for purpose in terms of being a vehicle for house purchasing, but not as a vehicle for retirement saving. If it is to be a pensions alternative it needs to count as a pension for means-tested benefits purposes.
2. In my opinion there is no transition because they are separate use-cases. My wife will not be continuing to use her LISA now that she has used it to buy into our house for example.
3. Whether the LISA is good value for money depends on which governmental aims we are talking about. If the aim is to improve property ownership figures amongst younger people it is probably helpful. If the aim is to improve retirement savings for the self-employed it is not helpful at all.
4. The Lifetime ISA is not remotely suitable as a pensions saving product, principally because it is not counted as a pension when it comes to means-tested benefits assessments.
5. I do not think the Lifetime ISA should be abolished as it still has value as a product, albeit it is in need of some reform.
6. The matter of the withdrawal penalty is complex. As I see it there are two options: either the withdrawal penalty should be removed altogether or the penalty should be kept in place but the Lifetime ISA should be disregarded from benefits means-tests as a pension would be. The latter choice has the advantage of meaning benefits claimants are able to continue to save for homeownership, potentially reducing the housing benefits bill later. The former would mean people could more easily access their LISA when out of work instead of claiming benefits in the first place. This comes down to a political choice, but either would be an improvement on the current system which is frankly nonsensical.
7. Restricting Lifetime ISAs to the self-employed would be counter-productive as part of the problem is that the Lifetime ISA fundamentally does not meet the needs of this group. Removing the withdrawal penalty or exempting the LISA from benefits assessment would help enormously in this respect.
8. The house price cap should probably be raised, but I believe tying this to inflation would be foolish and lead to the same sort of problems we see with the ‘Triple Lock’ on the state pension. If you want to lock the house price cap to something, lock it to average house price growth such that if house prices fall so does the cap and vice versa. Personally though I would remove the cap altogether and instead rely on the contributions cap to limit how much a person can save.
9. Where the contribution limit is set is a largely political decision around how much the government wants to spend on supporting young people into property ownership; if the government is willing to fund it I see no reason why the limit could not be raised to £20,000.
10. The Lifetime ISA is in desperate need of reform. As I mentioned above, at a bare minimum either the withdrawal penalty needs to be removed or LISA savings need to be disregarded from benefits assessments.
Additionally however I would suggest that the government remove the lower age limit and allow for Junior LISAs. Currently parents wishing to save for their children are forced to either choose between a JISA (with no tax relief but accessible from 18) or a JSIPP (with tax relief but not accessible until 57 with the spectre of this rising in future). Given that one of the key things parents often envisage their children using JISA savings for is a house deposit, it seems unnecessarily clunky that they are forced to shunt this money £4,000 at a time into a new account once they reach 18, particularly given they will now be able to earn their own money which they may wish to allocate to this purpose. Allowing parents to open a LISA for their children would not only enable them to save with both this purpose and retirement savings in mind (even if the child doesn’t buy a house the money is still accessible from 60), but it also alleviates one of the biggest fears that stop parents from opening JISAs – the risk that the child will withdraw the whole amount at 18 and spend it on things the parent considers unwise. If there is a 25% penalty on withdrawing, the child (now a young adult) will be far less likely to withdraw the lot and thus far more likely to keep it for a house deposit which will make parents far more likely to utilise it over a JISA or account in their own name. This is another reason the house price cap needs to be addressed however, as no parent will save into a LISA with a fixed house price cap as house prices could rise considerably between when they start saving and when the child is old enough to buy.
Finally, I also believe the requirement that you must have a mortgage to use a LISA should be removed. It is sensible to require a solicitor to ensure that the usage is genuine, but I see no reason why a mortgage should be necessary. It is already possible to save enough within a LISA wrapper to buy a house outright (I believe the current record stands at over £200,000), and if junior LISAs are allowed as per my above suggestion this will be even easier to accomplish. This will also have the side-effect of making the product more appealing to religious groups who are unable to access traditional mortgages due to beliefs around money lending.
In conclusion, from my perspective as a consumer the Lifetime ISA remains fit for purpose as a vehicle to help young people onto the property ladder however there continues to be a considerable degree of ignorance about the product among both high street lenders and conveyancing firms. As a vehicle for retirement saving the Lifetime ISA is a complete mess of a product in need of significant work. The main issue in terms of the former is the house price cap (which is just about fine for now but must necessarily increase with time), and in terms of the latter the withdrawal penalty which is in need of urgent reform (either by being removed or by being justified by a benefits disregard), but these are not insurmountable issues. I do however believe that uptake of the product could be improved significantly by removing the lower age threshold; there are lots of parents who forego saving for their children because they are worried about unfettered access to a JISA from 18. A Junior LISA adds a significant ‘sweetener’ to keeping the money for a house deposit (or indeed retirement) which I believe would see many more people take up the product (and indeed many more who would wish to transfer existing JISAs!). Given the timescales involved this would also be a way to drive investment, as people are more likely to open a S&S Junior LISA whereas they are more likely to open a cash LISA as an adult.
Thank you for reading my thoughts and I hope they are useful in deciding the future of the Lifetime ISA. As a final word I would like to say that I think the Lifetime ISA is one of the few true innovations we have seen in the consumer finance space for decades and feel it would be a real shame if something which is in my view a fundamentally good idea was consigned to history over a few easily-addressable flaws.
February 2025