LISA0185
Written evidence submitted by Baroness Ros Altmann
This response is provided by Baroness Ros Altmann, in a personal capacity, as a long-standing expert on pensions, savings and investment, particularly in terms of policy work in the context of social, national and consumer interest. Also, as a Former Pensions Minister who was part of the Government at the time Lifetime ISAs were introduced. The Lifetime ISA product was launched following aborted discussions and review of radical reform to pensions tax relief in 2015-16.
Summary:
The Lifetime ISA is not a suitable product for either house purchase or retirement saving. The restrictions, rules, age limits and penalties mean the product needs a fundamental redesign and, indeed, perhaps a new purpose. Confusing house purchase with retirement provision is not necessarily sensible and the two should be considered separate social aims. In fact, the Lifetime ISA product, as currently conceived, is not likely to last a lifetime! It provides a tax-free spending pot from age 60 and has been used by very high income younger people to top up tax-subsidised annual savings, once they have maxed out their pensions annual allowance. Is this a sensible use of taxpayer subsidy. I propose an altered version for consideration, with lower incentives for the house purchase product, that can then be further topped up by more taxpayer incentive if locking the money into a pension fund later on.
Answers to your questions:
No. I do not believe a product that combines property purchase and pension saving is needed and it actually adds to consumer confusion. Saving or investing to provide money to finance house purchase is a separate requirement for workers, from the need to ensure money is set aside to support them once they no longer work. The design of the Lifetime ISA was always fundamentally flawed, being neither fish nor fowl. It has clear mis-selling risks and arbitrary age and house value limits. The maximum sum for qualifying first home purchases has fallen behind the cost of many first-time homes, and has resulted in many young people, especially in London and the south East, finding that the home they wish to buy is above the Lifetime ISA limit. That causes them significant problems as they are hit by the withdrawal penalty. When trying to retrieve the money they saved in this product, they end up losing some of their own initial capital, as well as all the 25% bonus they originally received. This effective 6.25% (approximate) penalty is something many did not realise when first buying the Lifetime ISA and has been a great disappointment – as well as potential mis-selling claim. So, the Lifetime ISA has not been a suitable product for house purchase for some buyers, who do not know in advance whether that will be the case, which brings its suitability into question. As regards being a pension vehicle, the Lifetime ISA offers the same taxpayer add-on as basic rate tax relief, however on withdrawal at age 60 all the money can be taken tax-free. One, therefore, has to question what purpose the taxpayer subsidy has fulfilled? Pensions should be money for your much later life, not a spending pot for age 60 (of course people can take money out of a pension around age 57 (previously 55), but then they are taxed on all but 25% of it. The taxation of withdrawals, which pensions impose but which are absent in ISAs, is sensible in deterring excessive amounts being taken out while still relatively young – indeed at age 60 many of those taking their money may be still working.
There is not much transition. Most people do not think of moving their Lifetime ISA into a pension, unless they have a financial adviser saying they should get the benefit of higher rate tax relief perhaps. Indeed, the use of taxpayer money in the 25% bonus can also be questioned, because Lifetime ISAs have been a convenient way for younger people, who are earning very large salaries and have maxed out their annual or lifetime pension contributions, to receive extra taxpayer subsidies to put a further £4000 aside for the future with the equivalent of basic rate tax relief. On top of their maximum annual allowance, high-earners get an extra £1000 of taxpayer subsidy – but is that a sensible use of taxpayer resource? I don’t believe the Government has collected data on this.
Probably not. In light of my response above, I am not sure it is good value for money for Government at all, nor is it suitable for all those who may buy a Lifetime ISA. High earners do not need extra subsidy. And the complications, restrictions and penalties of the Lifetime ISA as a property purchase vehicle have not allowed it to operate effectively – and indeed carry mis-selling risks. Many people believe the 25% penalty is just a recovery of the 25% initial bonus – and I have seen marketing material implying this, without clear explanation of the fact that some of your own original capital is also at risk if you withdraw. This misperception is damaging to consumers.
I do not think so. A tax-free spending pot at age 60 is not a pension. The Lifetime ISA concept actually almost guarantees that the money will not last a lifetime! It could perhaps be a vehicle for auto-escalation, but not in its current format. An ISA structure incentivises having a spending pot at age 60, but that is not something society should be subsidising if it wants people to have pension income in future. The reason for taxpayer incentives for pensions is to help people supplement the UKs very low state pension, with additional income that can see them through retirement, as and when it is needed. This provides extra income for pensioners to avoid poverty and also provides additional future spending power for the economy in our aging population. If people have spent all the money before they reach their 70s, 80s or 90s, then future generations will be poorer. The pension framework ideally should incentivise people to retain funds for much later life (this used to be done by forcing annuitisation, which is both unpopular and potentially poor value). The post-2015 pension freedoms, allowing people to keep money invested, had the right behavioural nudges. The system incentivised retention, by taxing withdrawals. (and previously the tax free inheritance of unused sums, although sadly that element is now at risk and could also mean more money taken out while young). So the pension framework has had the right incentives to achieve the social purpose of more retirement income that lasts for your later years. An ISA framework does not do this. It incentivises spending the money straight away. Especially in light of the retrospective tax changes just introduced into pensions, there is a heightened risk that people will rush to take their tax-free Lifetime ISA money out as soon as possible, just in case future Governments decide to remove the tax-free status and introduce a retrospective tax on the withdrawals.
As currently constructed, YES.
That would certainly help alleviate the mis-selling risk and penalisation of first-time buyers in London and the South East or other areas where property prices are much higher than the national average.
This question seems to be asking whether a 25% bonus and tax free withdrawals at age 60 would be a good idea for workers such as the self-employed, who are not in auto-enrolment, or as a top-up to the minimum auto-enrolment contributions. However, the current design does not seem to make sense as an alternative to pensions. A straightforward product for low earners who are excluded from auto-enrolment, or the self employed, does make some sense, but that should not have the age 40 and age 50 limits nor any confusion with property purchase. Effectively, this would be a product that offers the equivalent of basic rate tax relief on the way in, can be accessed (subject to penalty) before retirement, and can then be spent all at once tax-free at age 60. I do not believe this is the ideal retirement provision vehicle, but it certainly would be more attractive for low earners and the self employed, who are nervous about not being able to access money if they really needed it, than saving in a bank account or ordinary ISA. The £4000 limit seems low for this, however.
I believe the cap is too low. It would need to rise with house price inflation or significantly increased so that no first time buyer is penalised.
If the Lifetime ISA is to be retained, I think all the rules and restrictions need to be revisited. If it is as a pension replacement (which I do not recommend, as I believe that the two purposes currently attempted by this product should be separated, not continuing to be confused) then it should be higher. But one has to ask whether this is a sensible use of taxpayer money as so many people are using it or could use it as a top up to the maximum pension annual allowance.
As a vehicle for house purchase, or a pension top-up, some form of ISA (but not the current Lifetime ISA structure with all its present rules) could be a product to consider for auto-escalation in the workplace. As auto-enrolment has been successful, it is not clear why an alternative to minimum pension contributions is required. However, as a replacement for the ‘sidecar’ savings, or as a way of getting people to set aside more than the auto-enrolment minimum, then encouraging employers to enrol staff into an ISA vehicle, with some of the extra money they receive in annual pay rises, could be a way of helping people save more than the auto-enrolment minimum, while also ensuring the basic minimum is not disturbed. Some people may prefer not to lock up more than the minimum for the moment.
I would also like to suggest a very different blueprint for this so called Lifetime ISA (Which as currently devised is not going last a lifetime!)
New type of product:
Offer people a 15% or 20% bonus (i.e. less than basic rate tax relief) to put money aside in this ISA that can be used for house purchase or withdrawn early on certain conditions, such as poor health, paying for care and so on.
Product available from age 18. If money is withdrawn for purposes other than house purchase, it will be subject to a penalty equivalent to recovering the initial subsidy (which will need to be recorded by the provider).
However, if the money is paid into a pension fund once someone decides they can manage without withdrawing it, and feels confident to have more money (on top of their minimum auto-enrolment pension amount) locked in until later life, then there will be an extra taxpayer subsidy added to the sum transferred over from this property purchase ISA vehicle (perhaps a further 10% - amount subject to cost modelling).
This could give incentives to lock money away later, still help people save for a first home without the current restrictions, so a simpler product. It has a lower taxpayer incentive initially but can then be moved into a pension for additional subsidy later.
February 2025