LISA0163

Written evidence submitted by Anonymous

Introduction

I am retired since 2020 having worked in financial environments all my working life. Initially in branch banking, then management with a speciality in all aspects of mortgages (lending through to debt recovery). Latterly I worked in IT roles for several years, finally as a Systems Analyst covering all aspects of both savings and mortgages.

One of my last significant projects before retiring was as the IT lead on the implementation of Cash Lifetime ISA into the core administration system, including management of all testing of HMRC APIs, core software integration and new business process development. I was also a SME (subject matter expert) for most things ISA / LISA and savings reporting to HMRC.

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Response

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

Errors:

Before responding to that question I believe it is appropriate to correct the errors in the questions posed:

(i) In the ‘Call for Evidence‘ the Treasury Committee state ‘At the end of each tax year, this is topped up by a 25% bonus from HMRC’. This is incorrect – the Bonus is processed monthly;

(ii) In this question it is stated the LISA can be used for ‘pension saving’ – at the inception of LISA it was made abundantly clear that a LISA is not a pension and should not be seen as such. It is however suitable for, as stated in the Call for Evidence ‘…an alternative method of tax-free saving for retirement…’.

It does not bode well if the Treasury Committee do not fully understand at the outset that which they may be about to change.

Response:

In my experience I believe Lifetime ISA (LISA) is suitable as a combined product for both purposes.

However, it may as yet be too soon to comment in detail on ‘saving for retirement’ as the oldest LISA customers are not yet close to retirement age and have a maximum of around eight years savings (i.e. LISA launched April 2017, maximum age to open a LISA is 39 years, therefore the oldest LISA Investors cannot be close to retirement age yet, even early retirement from age 55 years, and withdrawals without penalty cannot be made until age 60 years).

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

As the response above, it may be too soon to tell.

My experience was that the majority of Cash LISA Investors were younger and initially aiming for property purchase, perhaps encouraged by parents to plan for their future. It may be that Stocks and Share LISA Investors are older, prepared to accept more risk, and aiming for savings for retirement – but that is outside my experience.

I would have thought that HMRC analysis would be more able to determine both this split and whether LISA Investors who have gone through successful house purchase then continue to invest and claim Bonus credits.

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

That is a question the Treasury Committee will ultimately have to answer.

I believe it is good value in that it encourages longer term thinking and planning for the future whilst at the same time better locking in the ISA tax incentive for saving.

The restrictions on withdrawal are appropriate except for house purchase (Q8 below).

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

It is not a pension and is not suitable to be promoted as such. It is not suitable to be a pension.

At pension age / retirement what can be done with LISA funds is likely very restricted when compared to the options available with a normal pension fund.

The oldest current Investors, at least those in a Cash LISA, will have had less than 10 years so far to save a relatively modest amount in to the LISA before they are prevented at age 50 from saving more (HMRC web site – ‘When you turn 50, you will not be able to pay into your Lifetime ISA or earn the 25% bonus. Your account will stay open and your savings will still earn interest or investment returns.’).

It could be argued that from age 50 the Bonus should still be paid (likely annually) based on the lesser of the amount invested (total deposits, excluding interest and bonus) or the annual investment limit, provided that no withdrawals other than Life Events are made in that year. This would strengthen the argument for longer term savings.

5. Should the Lifetime ISA be abolished?

No – it serves a useful purpose.

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

Response

No – the withdrawal penalty is a key feature that both promotes the ‘long term’ aspect of the LISA and recovers the Bonus when appropriate. If the Investor makes repeated withdrawals and is happy to pay the penalty then so be it – it is their money after all and HMRC do get the Bonus back plus extra.

Reform suggested

There is though a case for looking in more detail at Investors who have made withdrawals to see if there are other ‘Life Events’ that are not currently encompassed by the product yet which are financially material to the Investor. For example, but with some appropriate financial limits:
– Birth of a child / Legal adoption / Fostering with the intention of adoption of a child and associated increased costs? Though there would need to be clarity on which parent could make the withdrawal or whether it is shared.
– Lost employment (possibly excluding redundancy with a significant redundancy sum received) and need to access funds?
– Marriage / civil partnership personally I would exclude – the amount spent is largely at the Investors choice, as is the timing.

Both of the ‘acceptable’ situations can be relatively easily evidenced by current approved / official documentation though a new Declaration form would be required.

A limit would be appropriate, for example (i) apply the ‘account open 12 months’ rule, and (ii) a maximum withdrawal amount, say £4,000 / one year’s maximum LISA contribution.

To be clear though, things like holidays, car purchase are a choice, not a Life Event.

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

No. That would effectively limit its scope to a quasi-pension and lead to more appropriate pension savings / options being ignored and also its use for other Life Events.

That said, a LISA would be better than no pension at all so with appropriate warnings / advice given it could usefully be brought to the attention of those who cannot or choose not to access a work place pension.

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

Response

At the very least it should be raised in line with house price inflation (not RPI / CPI) otherwise one of the key purposes of the LISA is devalued, especially for younger Investors.

Equally, I do not believe the cap should be removed but do believe that the upper limit should be restated in a different way.

Reform suggested

By having the cap set on the house price the Government is attempting to manage the activities / life of the Investor by limiting their options at a key juncture. The best property option for the Investor may be one which slightly exceeds the upper limit, yet they are forced to either purchase a less appropriate property or pay the Penalty for withdrawal even though they are using the funds for the intended purpose.

The current HMRC web pages state the rule as ‘…You can use your savings to help you buy your first home if… the property costs £450,000 or less’. If this was restated to:

You can withdraw money from your savings to help you buy your first home without incurring a withdrawal penalty provided the maximum amount you withdraw is the lesser of the property purchase price or the upper limit for property purchase (currently £450,000).

This would still maintain the upper limit but test it against the amount withdrawn rather than the property purchase price.

I believe this change could be made relatively quickly to the rules and also in the forms / declarations required at purchase.

However, what is not clear is whether in the API processing HMRC validate the ‘Purchase Price’ submitted. There does not appear to be a ‘Failure’ response for ‘Purchase price limit exceeded’ but that doesn’t mean there is no validation. A change to the API should not though, take an extended period.

Similarly, at the ISA Manager end, there is likely to be validation (there is at my former employer) to prevent LISA Rules being broken, but likely it is parameterised (it is at my former employer) and could be quickly and temporarily set to a very high value to allow the API calls to continue to function whilst the software changes are made for the validation also to be applied to the withdrawal amount in addition to the purchase price / upper limit.

Separately, it could be made clearer in HMRC documentation that the Purchase withdrawal(s) can be used for the purchase deposit, not just at purchase completion. The deposit is the point at which the Investor is most likely to need to commit their own funds.

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

Yes, if the overall ISA limit is being raised at the same time, and the proportion of LISA to overall ISA limit is broadly maintained (e.g. overall ISA limit increased to £25,000, increase the LISA limit to £5,000).

To increase the LISA limit alone would be useful but without an increase of the overall ISA limit poses other questions. Maybe there is HMRC data that would show the number of Investors who hold both ISA and LISA and pay into both up to the annual limit of each. If it is relatively few then maybe the argument for increasing the LISA limit on its own is appropriate. But there will of course be a cost in increased Bonus payments.

Not asked but an equally valid question is, ‘Should the LISA limit be reduced?’. The answer would be no. Saving for house purchase especially requires significant sums to be accumulated. The current limit I believe achieves that aim in a managed way over a reasonable period and without excessive cost in Bonus credits made.

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

Yes:
(i) Possibly include other Life Events (see 6 above); and
(ii) The Purchase Price upper limit reformed (see 8 above).

11. References:

Treasury Committee ‘call for Evidence’:
https://committees.parliament.uk/committee/158/treasury-committee/news/204592/is-the-lifetime-isa-fit-for-purpose-in-2025-committee-calls-for-evidence/

HMRS LISA information
Overview: https://www.gov.uk/lifetime-isa
ISA Managers guidance: https://www.gov.uk/guidance/lifetime-isas-for-isa-managers

HMRC – Conveyancers guidance:
https://www.gov.uk/government/publications/conveyancers-lifetime-isa-technical-guidance/conveyancers-lifetime-isa-technical-guidance

HMRC LISA API details:
https://www.gov.uk/guidance/digital-reporting-for-lifetime-isas
https://developer.service.hmrc.gov.uk/api-documentation/docs/api/service/lisa-api/2.0
https://developer.service.hmrc.gov.uk/api-documentation/docs/api/service/lisa-api/2.0/oas/page

February 2025