LISA0179
Written evidence submitted by UK Finance
We welcome the opportunity to provide a written submission to the Treasury Select Committee (TSC’s) call for evidence on the Lifetime Individual Savings Account (LISA).
The Individual Savings Account (ISA) plays a pivotal role in fostering a strong savings culture and providing millions of individuals with a tax-efficient way to save. A key strength of the ISA regime is its broad appeal to a range of savers/investors, providing options to suit different risk and reward appetites, as well as catering to different life stages. In recent years, significant work has been undertaken by government and the industry to make ISAs more flexible, easier for consumers to use and understand and to address barriers to saving and investment.
While we would strongly caution against reintroducing significant complexity into the ISA landscape (in particular any changes that would result in a return to the more complex ISA Regulations in force from 1999 to 2014, when the cash ISA subscription limit was lower than the overall subscription limit), we would strongly recommend HMRC and HMT review the current Lifetime ISA as it continues to be an outlier in this general simplification drive. Since the inception of the LISA, we have flagged reservations about the product and made suggestions for its improvement, which have not yet been adopted. Consequently, the LISA has not been widely adopted and offered by the ISA provider community.
ISA providers remain fully committed to working collaboratively and constructively with the government to ensure the continued success of the whole ISA regime and would be pleased to work with His Majesty’s Revenue & Customs (HMRC) and His Majesty’s Treasury (HMT) on the evolution of the LISA to address perceived issues with the product. We would also urge the government to not only give serious consideration to the recommendations included below, but also to provide a strong endorsement that the amended LISA is here to stay, so that ISA providers can have the confidence to commit to the product.
Additionally, we see a vital role for government (through public campaigns and channels such as the Money & Pensions Service) in supporting financial education, to help savers and investors make informed choices that align with their individual circumstances. By equipping people with the knowledge to navigate their options, savers can identify the right products for their needs, life stage and risk tolerance.
Specific Questions
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's main selling point is the 25 per cent bonus that the government pays on savings. This provides a significant incentive to save/invest. However, there are limitations in the current LISA design that impact its effectiveness for consumers and attractiveness to ISA providers.
Considering the Financial Conduct Authority’s (FCA) four Consumer Duty outcomes, there are elements of the current LISA which are problematic. In particular, the 25 per cent exit charge which may result in outcomes for some customers which demonstrate a lack of suitability of the Product/Service and poor Price/Value.
The exit charge creates the following challenges:
The LISA is complex in design, with restrictions on age for access and deposits, allowable withdrawals and associated charges, which makes it challenging for consumers to understand and for ISA providers to administrate. Additionally, the name ‘Lifetime ISA’, while needed for the combined purpose of the product, does not clearly direct consumers to its purposes.
The LISA rules have remained static since the accounts were introduced, despite rising house prices and increased living costs. The £450,000 limit on the value of property that can be purchased with a LISA potentially limits LISA take-up amongst investors.
The LISA also has limitations and challenges in terms of retirement savings objectives. A saver has to open the account before the age of 40, when many individuals may not have actively started thinking about retirement planning. It would make sense to extend the maximum age limit and also the limit on paying into the LISA to when consumers may be more engaged with their retirement goals.
The use of the product for pension saving may also present some risk for ISA providers from a Consumer Duty and customer understanding perspective, as other pension products may better serve their needs. Without good guidance, there is a risk that the customer may not sufficiently understand their options and suffer a financial detriment.
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 average time taken to save a house deposit is 7 years, we believe it may be too early to be able to assess this, given that LISAs were launched in 2017. Additionally, as yet, no LISA holders have reached age 60, given the minimum age of entry is 40.
We anticipate that the transition between these saving objectives will likely depend on the age of the customer at the time of the house purchase and how much they are able to save after this. The “Affordability to Save” may be impacted by the new mortgage. associated house outgoings and other commitments, such as having children.
Over 60 per cent of first-time buyers were over 34 in 2023/4 (of which circa 27 per cent were over 39). The current age cap of 49 before no further deposits / or government bonuses can be added, means this can limit the future potential of retirement savings.
In future, the transition between house purchase and retirement saving might be evidenced by customers switching from low risk to higher risk assets or switching provider as their use transitions to a longer timeframe.
3. Given its policy purposes, is the Lifetime ISA value for money for the Government?
This is a question that can most appropriately be answered by HMT and HMRC.
4. Is the Lifetime ISA a suitable pension savings product?
The LISA product has many differences to the long-established personal or workplace pension more commonly used for retirement planning. Age limits for contribution and for access, contribution limits, tax treatment on contributions, bonus, employer support, tax treatment of withdrawals are all material differences.
The £4,000 a year limit on contributions suggests that it should not be a stand-alone retirement solution but rather primarily as an option to supplement other retirement planning arrangements, perhaps where their effective limits have already been reached.
The LISA currently does not allow contributions after age 50, at which stage individuals may have more disposable income and a greater appetite to engage with retirement planning, which is a barrier to its use for additional retirement savings.
5. Should the Lifetime ISA be abolished?
No, for those customers and ISA providers that have already invested in the LISA product this would be a bad outcome.
We support targeted government bonuses and tax-efficient savings options to encourage saving and make home-ownership more accessible. UK Finance previously urged the government to retain the Help to Buy ISA, which was a predecessor to the LISA, but a decision was made to close the product to new investors in November 2019, and it will lapse for existing investors in November 2030. Consequently, LISA is the only dedicated vehicle to provide government support for this purpose. We believe that the LISA would benefit from modifications to make it more suitable and effective.
6. Should the Lifetime ISA be reformed to remove the withdrawal penalty?
Yes, the LISA withdrawal charge of 25 per cent should be reconsidered.
In June 2024, MPowered Mortgages published details of HMRC’s response to a Freedom of Information Request which revealed that just 12 per cent of LISA savers have successfully used their account to buy a home, while 185,000 have collectively been fined £127 million for making unauthorised withdrawals, with the average penalty being £684, including lost interest.
Reducing the charge to 20 per cent would allow consumers the option to access their original capital without penalty, should their circumstance or needs change. With such a change, many of the difficulties outlined in response to Q1 are mitigated and the appeal of the product is enhanced for consumers and providers
We are mindful that allowing customers to exit at parity with their contribution does leave the product open to customers who are not committed to using it for the intended dual-purpose. This might make it more difficult to forecast take-up and contribution levels and therefore cost, at least in the short term.
7. Should the Lifetime ISA be restricted to those with no access to a workplace pension?
The LISA has a dual-purpose and absent any alternative arrangements for targeted government support or bonus arrangements to encourage saving to make home-ownership accessible, we would not support restricting LISAs to those with no access to a workplace pension.
Reducing LISA eligibility in this way would make it more administratively difficult for current providers, while also significantly reducing the potential target market for the product, making it less viable for current providers and potential providers.
We consider that the risk of individuals choosing a LISA to save for retirement rather than joining a workplace pension, where they are eligible for one, would be better managed by ensuring potential LISA customers are provided with the relevant information about potential options for retirement saving and relevant warnings. For example, for those with no access to a workplace pension, a Self-Invested Personal Pension (SIPP) might be a better alternative for retirement savings than a LISA.
8. Should the Lifetime ISA house price cap be raised in line with inflation, or removed?
Yes, the LISA house price cap should be reconsidered.
The £450,000 limit on the value of property that can be purchased with a LISA has not been updated since it was introduced in 2017 despite house prices increasing by more than 25 per cent over this period.
We would favour the removal of the cap altogether for simplification purposes and to address the significant regional variations in property prices. In the alternative, we would propose that the limit on property purchase values is reset periodically to keep pace with house price inflation. We would prefer to avoid any additional unnecessary administrative burden or confusion arising from automatic annual indexation.
9. Should the annual Lifetime ISA limit be raised from £4,000?
Yes. We would favour an increase in the annual cap that can be deposited and, thereafter, periodic reviews rather than annual indexation.
ISA providers are required to think about product transparency and how to make products easy for consumers to use and understand. The £4,000 annual LISA limit is not easily divisible by 12 (£333.33). For this reason, we would favour periodic review of contribution limits rather than annual indexation.
We would recommend that the government bonus remain at 25 per cent of the new limit, as this is the main appeal of the product.
10. Should the Lifetime ISA be reformed in any other way?
The government might consider whether to revise or remove the LISA age restrictions. Limiting account opening to under 40-year-olds is unnecessarily restrictive for older first-time buyers, and preventing contributions after the age of 50, does not align well with meeting a retirement planning need.
Our preferred approach to addressing the challenges with the LISA exit-charge is to reduce the charge from 25 per cent to 20 per cent. An alternative option is to add other big lifetime events to the list of circumstances under which penalty free withdrawals could be made – such as in the event of redundancy, the birth of a child, divorce, circumstances of domestic abuse, or critical illness. However, we would note that this would additional complexity in design and administration, and therefore we are of the view that reducing the charge is a better option.
February 2025