LISA0187
Written evidence submitted by PIMFA
The Personal Investment Management and Financial Advice Association (PIMFA) is the UK’s leading trade association for the wealth management and financial planning and advice industry. Our membership is mostly comprised of small and medium sized businesses, serving individuals and families across the United Kingdon. Collectively, this industry looks after £1.6tn in retail assets and employs over 60,000 individuals. The wealth management and financial planning industry plays a vital role in helping to stimulate UK growth. UK wealth management companies deploy retail savings into productive investment, helping businesses access capital to grow. Our sector plays a direct role in growing UK wealth, increasing disposable income across working lives and well into retirement and giving people the confidence, stability and security to make complex decisions which can only be conferred by the support of a trained professional.
As a general observation, the vast majority of our membership neither manufactures and/or distributes the Lifetime ISA (LISA) or advises clients on purchasing one. As a result, we have chosen to keep our response to this call for input reasonably high level – we do not have data on how consumers transition between using the LISA as a house purchasing vehicle to pension saving nor do we have any data regarding its attractiveness relative to other wrappers – namely the ISA.
We consider that the LISA lacks clarity of purpose. Largely as a result of its provenance as a policy intervention, it is neither an adequate vehicle for pension saving, whilst it has self-imposed limitations as a tool to purchase a home. We see value in it continuing to serve a dual role but consider that there is scope to reform exactly who it serves and how it serves them.
As a tool to enable home ownership, we consider that the LISA is clearly serving a valuable role. Over the course of the last 6 years the number of people using the LISA to fund a house purchase has steadily increased and, as you would expect, the average value of withdrawals used from the LISA has increased. We consider that the LISA serves a valuable purpose in helping to fund home ownership and fills a gap that the absence of the Help to Buy ISA has created.
In order to help it better meet its purpose as a tool to enable home ownership, we consider that the upper price limit for a house purchase should be raised from its current limit of £450,000 to £500,000 and then reviewed on an annual basis in line with house price inflation. Doing so would assuage our primary concern regarding how the LISA is currently being used: the withdrawal penalty. Feedback from LISA providers suggests that it is common for a withdrawal penalty to be applied where the saver has been unable to use their LISA to purchase a house due to the value of that house exceeding the current upper limit. Placing an upper limit on the LISA is important to ensure that it is a well targeted intervention, but it is curious that the upper limit is so far below the average house price in London. By increasing the upper limit for house purchases, we would expect instances where a withdrawal penalty is charged to decrease.
Whilst it is true that the LISA lacks clarity of purpose, we do strongly believe that as well as tool to enable home ownership, it has potential to be an attractive vehicle to house the pension savings of self-employed workers. As you will be aware, a very small proportion of self-employed workers have access to a private pension – as low as 20%. Whilst we are clear that the self-employed cannot be considered a homogenous group, there are clear reasons why participation rates remain low and have not reflected the rise in private pension participation among employed cohorts.
We consider the primary reason to be the absence of the ‘opt-out’ mechanism which currently pervades automatic enrolment. Whilst this is a significant contributor, we do not consider it to be a realistic ambition to replicate this for self-employed savers. We would also point to the volatility of income which is inherent for self-employed workers and has, as a result, impacted on self-employed savings patterns. Crucial to mitigating the concern that money will be ‘locked away’ in the way that is currently the case for pension savings, is allowing for an element of withdrawal flexibility which the LISA as currently constructed offers – albeit with a withdrawal penalty.
Were the LISA to be focused on enabling self-employed pension savings, we would advocate for the inclusion of an ‘Emergency Withdrawal Allowance’. Such an allowance would have to be relative as a percentage to the total funds under management, be subject to an upper limit, and only be accessible if the individual accessing it was primarily self-employed at the beginning of any given tax year. We would advocate for the LISA to be flexible in order to allow for repayments of withdrawals.
As a final point, we consider that there would be value in increasing the annual subscription limit for LISAs in order to make it a more attractive product. We accept that this is complicated by the presence of the government bonus and would not advocate for this being extended beyond its current cap up to £4,000 of annual subscriptions. For self-employed pensions it is particularly necessary for the annual subscription limit to be increased in order to deliver adequate retirement incomes and the presence of a government bonus on up to 20% of these contributions would adequately replace the tax relief benefit that self employed savers do not benefit from (were they to pay into a LISA) as well as missing employer contributions.
We would be very happy to discuss the details of our response with you further.
To our comments above, we consider that the primary issue with the Lifetime ISA is that it lacks clarity of purpose – it is neither an entirely suitable vehicle to accumulate pension wealth, nor is it especially well suited to funding house purchases in London and the South-East.
With respect to the design, we consider that the foundational principles are right. Whilst we do consider that the annual subscription limit should be raised, we acknowledge that this cannot also be applied to the application of the government’s 25%. Doing so would make the benefits associated to the LISA too generous, likely inflate house prices and certainly be unaffordable for the Exchequer.
We have no comments to make.
We have no comments to make.
4. Is the Lifetime ISA a suitable pension savings product?
In theory, we consider that the Lifetime ISA could be a suitable savings product for self-employed savers in particular. However, its current design and, in particular, the cap applied to annual contributions make it a sub-optimal wrapper. In order to make it a more suitable pension savings product, we would advocate for an increase in the annual limit, albeit with a cap on the government’s 25% bonus.
As above, to accompany this, we consider that there is scope to introduce an ‘Emergency Withdrawal Allowance’ for self-employed workers. Doing so would allow them to navigate periods of economic inactivity whilst still providing a viable long-term savings vehicle for self-employed workers to build long term savings adequacy.
5. Should the Lifetime ISA be abolished?
No. We consider it should be reformed.
6. Should the Lifetime ISA be reformed to remove the withdrawal penalty?
We are sanguine about the presence of the withdrawal penalty provided that this penalty is applied in a proportionate manner. As above, we consider that the presence of a 25% bonus from the government represents an obvious and generous incentive for savers to use the Lifetime ISA provided that they use it for its intended purpose. In instances where an individual makes a withdrawal from their LISA which is not for its intended purpose, we consider it reasonable that a withdrawal penalty is applied.
As above, it is currently a point of concern that individuals find themselves subject to the withdrawal penalty through no fault of their own when they no longer qualify for use of the LISA to purchase a home. We consider that this can be mitigated by simply raising the Lifetime ISA house price cap to a number which reflects the UK’s housing market in 2025 and beyond.
As above, and with reference to our answer to question 7, we consider that there may be value in focusing the LISA as a long-term savings vehicle for the self-employed. However, this will only be achievable if some form of withdrawal is allowed without a penalty associated to it. We would advocate for the introduction of an Emergency Withdrawal Allowance for self-employed savers (verifiable on application to withdraw) which would permit savers to withdraw a percentage of the value of their LISA without being subject to a withdrawal penalty.
7. Should the Lifetime ISA be restricted to those with no access to a workplace pension?
We remain of the view that it can serve a dual purpose both as a vehicle to purchase a first home, as well as a long-term savings vehicle.
However, we do consider that there could be significant value in focusing the LISA as a potential solution to the self-employed savings gap. As you will be aware, there is currently a significant disparity between the number of employed worked currently saving into a pension scheme compared with the self employed. This is, in part, a function of automatic enrolment and the principle of opting out and inertia which governs it. As you will know, self-employed workers are not subject to automatic enrolment and there is currently no mechanism to ‘automatically enrol’ them.
An additional driver for non participation is the volatility of income that often accompanies self-employment. It is both difficult to set aside (and in the case of pensions, lock away) money every month knowing the same amount will be paid the month after and, as a result, some – not all – self-employed workers tend to make one off payments to various accounts as part of their annual budgeting. Whilst pension schemes are able to accommodate this, income volatility means that locking money away for an extended period of time as would be the case for a pension scheme makes it difficult to manage periods where income streams are not as consistent as they could be.
We consider that the LISA – and in particular the associated benefit of a 25% government top up – would be an excellent vehicle for most self-employed savers provided that some form of withdrawal functionality was provided for with no associated penalty. We would suggest that were the withdrawal penalty to be reformed, the LISA should be ‘flexible’ in order for any withdrawn money to be repaid.
8. Should the Lifetime ISA house price cap be raised in line with inflation, or removed?
We would support an immediate increase of the Lifetime ISA house price cap to £500,000 followed by an annual review of the Lifetime ISA price cap in line with house price inflation.
9. Should the annual Lifetime ISA limit be raised from £4,000?
Yes. We consider that the Lifetime ISA should be equalised with the existing ISA regime – e.g. an individual should be able to contribute up to £20,000 a year. In increasing the annual limit, we do not propose allowing for the government bonus to be applied to the full annual amount.
10. Should the Lifetime ISA be reformed in any other way?
No. we are generally of the view that the Lifetime ISA should be subject to tweaks to its initial design rather than be subject to total reform.
February 2025