LISA0186

Written evidence submitted by Anonymous

I have a career of more than 15 years across a range of different sectors in the financial services industry, including retail banking, pensions, campaigning, and now payments. Generally speaking, I have pursued roles where I can enable ordinary people to enjoy greater benefits from financial services, and to help reform the financial system so that it better serves the interests of individuals, small businesses, and society at large. Over time this has allowed me to develop expertise on the topics of financial inclusion and impact measurement in particular, as well as to gain experience of financial exclusion in multiple different settings and for different groups of people. This adds to my personal experiences of financial exclusion earlier in life, growing up in a modest household.

While I will draw on my career history and work experience in this submission, I am writing this in a personal capacity as an interested citizen. All views are my own, and do not represent the position of my current or any past employer.

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

Pensions savings rates are concerningly low in the UK, and the problem is underappreciated by the general public. According to research from Phoenix Insights, more than half of savers into modern “direct contribution” (DC) pension schemes are not saving enough to achieve a “minimum standard of living” in retirement,[1] a definition created by the Pension Living Standards Association[2] which has swiftly become the industry standard benchmark.

In total, 55% of savers into DC schemes will not achieve this minimum standard of living in retirement, equating to roughly 17 million savers - however, this figure only includes those who are currently saving into a scheme, and excludes many others who are not.

For instance, one YouGov poll found that 16% of people who are working are not saving into a pension,[3] suggesting around another 5 million workers. On top of this there are 1.5 million people officially unemployed,[4] and a further 9.3 million people economically inactive, of whom only roughly 11% are already retired,[5] who will be unable to contribute to long-term savings because they have no or very limited income.

Taken collectively, this equates to potentially more than 32 million people who are not saving enough to provide an adequate income in retirement. In other words, almost half the population of the country may be at risk of hardship and even poverty in later life. 

Table 1: Groups not saving enough for retirement

The true number of people with inadequate savings when they actually reach retirement will be lower than this, due to inheritances, property ownership, increased savings later in life, and a myriad of other factors. Nonetheless, the point remains that a hugely significant number of people are not currently saving enough to fund a reasonable standard of living in retirement.

There is also significant body of evidence that suggests that many undersavers are not aware that they are not saving enough, and that many do not understand the decisions and considerations that are required in order to optimise their retirement savings.

From a macro perspective, the switch from Direct Benefit pension schemes to DC schemes has transferred risk and responsibility for retirement savings away from corporates and towards individuals. While this has successfully improved the sustainability of the private pension sector, the increased demands and expectations that it transfers to consumers have not been well engaged with, understood, or adopted by many in society, particularly among those without significant savings.

At the same time, house prices have grown exponentially, and the multiple between average house prices and median wages has also risen dramatically. Traditionally, property is the largest asset that people own later in life that can support their retirement, and the second largest is their pension. Both have become increasingly difficult to afford in recent decades, particularly housing, while pensions have gotten both more complex and require more financial sophistication from individuals to get the most out of them.

Consequently, the core function of the Lifetime ISA product is ultimately a good one. It supports and incentivises people to accumulate wealth in the two assets that can make the biggest difference to their retirement, and which have experienced some of the biggest affordability pressures in recent times. As such, the LISA is fit for purpose in its current design, particularly its characteristics that make it a dual-purpose vehicle for saving for both a house or a pension.

Whilst the product could do with modernisation and there are some tweaks to the design that could improve its ability to support desired impacts, the core principle of a dual purpose savings vehicle limited to property and pensions and supported by government is a very positive one. It is also a good example of a proactive, collaborative approach to tackling undersaving between government, industry, and individuals - something we need to see much more of if we are to address the significant challenges around retirement savings adequacy outlined above.

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

The LISA is a suitable pension savings product, providing consumers with an accessible route to investments and an additional, alternative means of building wealth for later life.

A surprising number of pension savers - 3 in 10 according to the FCA’s Financial Lives survey[6] - do not know that their pension is invested. This is a problem because it can inhibit peoples’ engagement with their pension, and their ability to make decisions that will optimise their retirement income.

Because of the need to make direct decisions about where your money is invested, the LISA may help to indirectly tackle this problem as it helps to introduce more people to investment practices, and to become more familiar and confident with savings and investment products. Multiple research insights from the private sector suggest that those with more products tend to have greater financial confidence and knowledge of financial matters. Consequently, accessing a Lifetime ISA can help improve financial literacy and confidence with pensions saving principles and practice.

5. Should the Lifetime ISA be abolished?

No, the LISA is a valuable product category within the UK’s savings product mix, and should be retained. It provides a useful savings vehicle for the two most important stores of wealth for an individual’s long-term financial resilience, and has added benefits for financial literacy, investment familiarity, and savings behaviours.

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

No, the LISA withdrawal penalty should remain, but it should be tweaked. It makes sense that the government would encourage and subsidise individual savings for a first home and/or a pension, not least because this encourages the individual to support their own retirement income to a greater degree rather than be dependent on Government, but also because it encourages greater engagement with the wider financial system, including investment.

However, were the penalty to be removed then this would dilute the targeted nature of the government’s subsidy support, as the proceeds could be used for anything. Equally, it would undermine the purpose of the product category itself by conferring no incentive to leave funds in for longer term investment gains, or for the keystone assets of property or pension. Put another way, removing the withdrawal penalty would undermine the core purpose and character of the product category itself, removing not only its USP but also its purpose for existing.

The 401k savings product in the United States is similar to a pension in that it is a long-term product and the employer pays into it. But there is a much wider range of reasons that the saver can call on to withdraw their money, reducing its efficacy as a retirement savings vehicle. By contrast, UK pension rules are much more restrictive around withdrawals, and a saver can only access their money before 55 years old in exceptional circumstances, such as a terminal illness diagnosis. This can put people off saving into it in the first place, for fear that they might need the money sooner, particularly for a large purchase like a property, or that they might not live long enough to use the funds. The Lifetime ISA is somewhere in between the two, and positively so - it provides positive reinforcement and incentive to save for the long-term; the ability to access money for the keystone investment of a first home; but also allows withdrawal of the funds if needed, but with a withdrawal penalty to discourage this.

That said, the withdrawal penalty should be reformed so that it claws back only what the Government has contributed to the savings pot, rather than 25% of its total. Currently, the withdrawal penalty can be overly punitive by taking back from the saver more than they were supported with. For example, a saver who uses their maximum allowance for one year who then removes their funds a year later has been supported by the Government with £1,000, but faces a withdrawal penalty of £1,250 - a significant increase, and an unnecessarily punitive one.

Whilst this may mean that some individual savers create additional investment gains off Government capital that is essentially borrowed at 0% interest, this risk is outweighed by the positive benefits of encouraging savings and investment behaviours, and increasing the long-term financial resilience of more people in the UK.

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

No, the Lifetime ISA is a viable and valuable savings vehicle for all, not just those with no access to a workplace pension.

As discussed above, many of those with access to a workplace pension either do not use it, or are not saving enough into it. The LISA provides another route towards saving, as well as support and incentive for saving for a property purchase, which is important for many in the UK, not just those without a workplace pension. Because the individual needs to engage directly with the product, rather than passively in the case of auto-enrolled pensions, there is also greater opportunity for increased financial literacy and engagement through the LISA.

There would also likely be significant administrative challenges with implementing such a policy. How would providers define or enforce restrictions from people who have “access” to a workplace pension? Technically everyone has “access” to a workplace pension as anyone can be self-employed and set up a workplace pension for themselves. However the administrative burden and financial literacy requirements to do so are prohibitive. We should be encouraging savings behaviours, not restricting them, particularly given the widespread nature of undersaving across the country.

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

Yes, the house price cap should be reformed. Since the launch of the product in 2017 the UK average house price has risen around 30%, making the house price cap significantly less generous over time, with no reasonable justification or reason for why it should be.

The effect is even more pronounced in London, where even the average house price is significantly beyond the cap, standing at £508,000 in December 2023,[7] and having risen around 9% over the same period. This significantly disincentives people from saving for a house in London, despite this being the part of the country where housing costs are least affordable but the demand for workers is highest, including a significant proportion of lower paid workers.

Once again, we should be encouraging people to save for these core foundations of financial stability and resilience in later life, rather than discouraging or disincentivising them to do so. It also creates a fairly large disparity in fairness that the product will support first time buyers to afford significantly larger and more spacious properties in the regions, but not even an average or modest property in London.

Consequently, the cap should be raised by cumulative inflation since the product's launch, i.e. by 30% roughly, and an additional London weighting price band should also be considered.

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

No, the cap of £4,000 is a reasonable figure. Those who are able to save more than £4,000 per year, after payroll deductions, are probably not those who have the most need of support from Government savings subsidies.

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

Yes, the LISA wrapper should be extended to include more asset classes, for example crowdfunding assets as admissible in the Innovative Finance ISA wrapper, or to support policy aims such as increases to domestic investment.

February 2025