Written evidence submitted by the Association of Financial Mutuals

AFM Response to Treasury Committee Call for Evidence on Lifetime ISAs

1. I am writing in response to this Call for Evidence, on behalf of the Association of Financial Mutuals.  The objectives we seek from our response are to:

• Set out the value of Lifetime ISAs in the UK savings market;
• Speak to member experiences of providing Lifetime ISAs to UK savers;
• Provide a view on potential areas of reform to make the Lifetime ISA scheme more effective as a savings vehicle.

              About AFM and its members

2. The Association of Financial Mutuals (AFM) represents insurance and healthcare providers that are owned by their customers, or which are established to serve a defined community (on a not-for-profit basis).  The mutual insurance sector manages the savings, pensions, protection and healthcare needs of over 26 million people in the UK and Ireland, collects annual premium income of over £23 billion, and employs nearly 23,000 staff[1]. 

3. The nature of their ownership and the consequently lower prices, higher returns or better service that typically result, make mutuals accessible and attractive to consumers, and have been recognised by Parliament as worthy of continued support and promotion.  FCA and PRA are required to analyse whether new rules impose any significantly different consequences for mutual businesses[2] and to take account of corporate diversity[3]. Further, the Government have committed to double the size of the mutual sector as part of their agenda to grow the UK economy. FCA and PRA have been issued secondary competitiveness and growth objectives which should inform how they examine the impacts of regulation on mutual firms.

Introductory comments

4. Our members specialise in serving customers who are hard to reach and underserved by traditional financial institutions. Because of their structure and the mutual ethos underlying their businesses, they are uniquely able to help their customers by offering a wide range of products which are tailored to suit their specific needs regardless of income level or financial stability.

5. The Lifetime ISA savings scheme was introduced in 2017 as a product to help individuals save for a first-time home purchase as well as for their retirement. Many of our members have had success offering the product to their customers among a range of other financial products and services.

6. We feel there is great value in the Lifetime ISA which benefits individual savers as well as the wider UK economy. Its low minimum contribution requirement and its practical savings objective make it an accessible option for individuals. It plays a vital role in promoting home ownership at a time when first-time buyers face many challenges including limited housing stock, increasing property values and a growing wealth gap.

7. Beyond these explicit benefits, the Lifetime ISA is one part of a wider ecosystem which enables and incentivises people to save for the future. Getting people in the habit of saving is crucial for building individuals’ long-term financial resilience. Uncertain market conditions and an increasing cost of living mean that it has never been more important to support vulnerable populations in building their savings with products like the Lifetime ISA.

8. However, we do feel that targeted reforms could improve the effectiveness of Lifetime ISAs. The scheme can suffer where complexities make it confusing for customers to know when or how to use it in conjunction with other savings products. Further, specific limits which were integrated into the scheme upon its introduction nearly 8 years ago are no longer fit for purpose in the current economy.

9. We have responded below to the specific questions raised in the Call for Evidence. We would welcome the opportunity to discuss further the issues raised by our response and are happy to be included in the published list of respondents.

AFM responses to questions raised in the Call for Evidence

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

The Lifetime ISA is a valuable product which incentivises young people to develop a habit of saving through government bonuses on contributions. Where individuals may have a variety of savings requirements and abilities, it is important that the market offers a diverse range of products to accommodate their needs. Lifetime ISAs offer several unique benefits including a 25% government bonus on savings contributions, and low minimum contribution requirements.

However, there are aspects of the Lifetime ISA scheme which could be reformed to make it a more effective product and enable more individuals to take their first step onto the property ladder.  We feel there is a strong argument to be made for raising the maximum property value which savings can be used for, and we would also argue that the maximum contribution should be increased. We feel that the scheme could further benefit from simplification; one way to achieve this is to focus on first-time home purchases as the primary goal of the product, with the option for pension savings only if the saver never purchases a home.

Question 2: How well do consumers transition between using the Lifetime ISA as a product for house purchase, to then a product for pension saving?

Our members which provide Lifetime ISA products tell us that the vast majority of their customers use the scheme to save for a first-time home purchase. They have not experienced customers transitioning the purpose of their Lifetime ISA from a first-time home purchase to a pension savings tool.

Question 3: Given its policy purposes, is the Lifetime ISA value for money for the Government?

The Lifetime ISA (and the Help to Buy ISA before it) was introduced with a primary purpose to aide people in saving for their first home purchase. Home ownership is a pragmatic way for individuals and families to build capital through equity and develop financial resilience. Further, getting more people on the property ladder decreases the burden on government-provided social services.

Nearly 230,000 account holders have used Lifetime ISA funds to make a first-time home purchase since the product was launched in 2017.[4] This is evidence of the product’s usefulness and ability to meet its original purpose.

Further, the Government has set forth specific objectives for growing the UK economy. Where individuals save through Lifetime stocks and shares ISAs, these funds can be invested back into the UK economy, providing additional value for the Government by progressing broader economic objectives.

Question 4: Is the Lifetime ISA a suitable pension savings product?

There are a wide range of products which help individuals save for retirement, and indeed some of those products offer better long-term value than the Lifetime ISA. It can be confusing for a customer to understand which pension savings products are best for them, and we feel that in its current state, the Lifetime ISA scheme with an explicitly stated purpose of pension savings adds to that confusion.

We feel that using the funds for pension savings should remain an option, but only as a last resort if an individual has been unable to purchase a home before retirement. Lifetime ISAs should not be advertised with an explicit purpose of pension savings.

Question 5: Should the Lifetime ISA be abolished?

Although the scheme needs reform, we do feel that there is strong underlying value in Lifetime ISAs as a savings product. Studies show that individuals are more likely to save larger sums of money when they’ve set meaningful goals with an end date and target figure.[5] Products which help individuals save for major life events such as a home purchase can build good habits and improve financial resilience.

The Lifetime ISA is the only product in the UK which specifically targets first-time home purchase savings. As stated earlier, the savings market benefits from a diverse range of products; the Lifetime ISA scheme is an important part of that landscape. Our members have experience working with customers who are underserved by traditional financial institutions. Better variety in their product offering allows them to provide more tailored financial services to their customers, which in turn addresses the wider societal challenges of financial inclusion and resilience.

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

We feel that the withdrawal penalty should be reformed. In its current state, the 25% withdrawal fee can take away from the amount the saver has put into the account, effectively penalising them for saving. Reasons for savers withdrawing Lifetime ISA funds outside the scope of the scheme could include purchasing a house outside of the property value limit, or a genuine emergency.

We understand that there must be a mechanism in place to ensure that Lifetime ISAs are used for their intended purposes, but we feel that the current penalty is too extreme, and it deters savers from opening Lifetime ISAs in the first place.

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

We do not feel that there should be any restrictions on who may set up a Lifetime ISA. We know from our members that the savings market benefits from a diverse range of product offerings which can accommodate a wide spectrum of savings needs and abilities. We feel that any restrictions which make savings products less flexible would be detrimental to their purpose.

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

We are in favour of raising the house price cap as the current limit of £450,000 is no longer practical in London and the Southeast region. In 2023, the average house price for first-time buyers in London was £492,234[6], making a Lifetime ISA an ineffective option for saving towards a deposit for a significant percentage of the population.

Given the volatility of the housing market and the strains on housing stock across the UK, we would encourage the Committee to ensure any limits on house price within the Lifetime ISA savings scheme are sufficiently flexible so that the product continues to be a valuable option for first-time buyers around the country.

Question 9: Should the annual Lifetime ISA limit be raised from £4,000?

We agree that the annual contribution limit should be raised from £4,000. Although inflation rates have returned to normal levels after hitting a high at 11.1% in October 2022, the cost of living has increased by 20.8% in the three years since May 2021.[7]

We feel that savings products should have the flexibility to accommodate individuals’ changing savings needs. Increasing the annual contribution limit helps to keep pace with changes in inflation and the cost of living.

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

As stated above, we feel that the Lifetime ISA scheme should be simplified to focus on saving for first-time home purchases. This objective is what makes the product unique, and in our members’ experience, is what the product is primarily used for.

February 2025