LISA0180

Written evidence submitted by Federation of Small Businesses

FSB welcomes the opportunity to provide a response to the above consultation.

FSB is a non-profit making, grassroots and non-party political business organisation that represents members in every community across the UK. Set up in 1974, we are the authoritative voice on policy issues affecting the UK’s 5.5 million small businesses, micro businesses and the self-employed. We believe it has the potential to be a useful product for self-employed people, subject to changes being made to the rules to make it more flexible.

At present, it is only possible to start a lifetime ISA before someone is 40 years old, and no contributions can be made after the age of 50. There is a 25% penalty on any withdrawals except those made to purchase a house or after the age of 60, so the product is not particularly attractive to people who may need to withdraw money to cover fluctuations in their income.

For example, take someone who pays in £4000 and receives the government contribution of £1000. This £5000 achieves investment growth of 5% over the next year, making a total of £5250.  The individual then experiences a financial shock and needs to withdraw the entire £5250.  With a 25% penalty the individual is left with £3, 937.50 and the government gets £1312.50. However, a 20% penalty would leave the individual with £4200 and the government with £1050, which seems like a fairer result as both parties see their original contribution grow by 5%. The government should consider making changes to the Lifetime ISA to make it more attractive as a savings vehicle for the self-employed.

The limit on the price of a home that can be bought with the lifetime ISA should also be increased or abolished, given that in some parts of the country £450,000 is significantly less than the average house price, and has not changed since 2017.

Because self-employed incomes often fluctuate throughout the year, early exit penalties can put them off taking out a LISA. If you’re not always sure where your next piece of work is coming from, not having ready access to your savings is a daunting prospect. Improving the ISA landscape will go some way to improving savings rates among the self-employed. Over the long-term though, more meaningful intervention is needed to ensure the self-employed are ready for retirement.

February 2025