LISA0193

Written evidence submitted by OneFamily

I am delighted to enclose OneFamily’s evidence on the Lifetime ISA. OneFamily is one of the country’s leading mutuals – we are owned by our 1.5 million members.

We believe that the Lifetime ISA supports savers and national policy objectives, and that with reconsideration of some of its important features, LISA’s positive impact can be even greater.

As an early entrant to the Lifetime ISA market, as well as a being a leading provider of simple retail investments in the mass market space, we hope that our contribution is informative and helpful.

Please do let us know if we can provide any further detail. Our perspective as a mutual delivering LISAs and a range of other popular, impactful products, is one we take great pride in. We would be very happy to provide our views publicly, or privately, as a witness for the committee.

Section 1. Background

1.1              About OneFamily

OneFamily is a mutual organisation, owned by its 1.5 million customers with £5.5bn funds under management. Our mission is to create and protect value for our members.

We have been providing simple investment products to our members for almost 50 years, and we are proud to specialise in helping lower income families who are often under-served in the investment market.

OneFamily’s journey began in 1975, as a Friendly Society providing Tax Exempt Savings Plans (TESPs) and since then we have supported all iterations of government-sponsored tax efficient savings products from Personal Equity Plans to ISAs, Child Trust Funds (CTF) to Junior ISAs and now Lifetime ISAs (LISAs). Our most recent development has been into the protection space, with the acquisition of life and critical illness provider, Beagle Street.

We are the largest Child Trust Fund provider, holding more than one in four accounts, distributing our product via large brands including Santander, Post Office, Legal and General, Asda and Sainsbury’s Bank.

Since 2009 we have been the ISA manager and service provider for the Post Office’s ISA products via a relationship with Bank of Ireland UK. This is a mass market product appealing to both young and old customers at all income levels that is made available via the Post Office branch network.

In November 2011 we were one of the first providers to enter the Junior ISA market after the withdrawal of the Child Trust Fund. We were also an early entrant to the LISA market in 2017.

Since September 2020, our customers’ Child Trust Fund products have been maturing. We are particularly proud of our maturity process innovations, which have made it as straight-forward as possible for our 18-year-old customers to access their CTF money.

When developing the journeys for this process we quickly realised that proving the identities of our 18-year-olds in an automated way was going to be a challenge due to lack of online “footprints” for a credit check, and that getting paper identification was also going to be problematic for this digitally focused generation.

As a result, we embedded Yoti’s online identification processes into our journeys, and this has worked incredibly well; creating a straight-through process for the c. 20k maturing teens, who each month are choosing either to withdraw money and / or provide an instruction to continue saving into a Lifetime ISA or ISA product.

Since September 2020 we have processed more than 750k instructions from CTF 18-year-olds with just over £1.4bn re-entering the economy from withdrawals alone (so far).

Earlier in 2020 OneFamily identified and flagged a problem in the maturity process of CTFs. The original law did not make provision for young people turning 18 who, to use the technical term, are ‘lacking mental capacity’. This is also an issue that affects holders of Junior ISA (JISA) accounts.

Under the Ministry of Justice’s instructions, families are required to complete complex forms, source files of medical documentation and make an application to the Court of Protection. This can be a stressful, lengthy, and expensive legal process.

So, we worked with other providers and created an industry-led solution, that enables families to access their children’s CTFs using a rigorous process. To date we have helped almost 2,000 families access their CTFs in this way. For four years we have campaigned but the last government’s position, despite a lengthy consultation, and a debate in Westminster Hall, remained largely unchanged.

These CTF initiatives are further evidence of how the mutual sector continues to work for the benefit of its members, making it as easy as possible for the benefits of their long-term savings to be realised.

To complement our proud investment heritage and broaden our customer offer, in 2022 we acquired Beagle Street, and subsequently became the insurer of all Beagle Street and Virgin Money term life insurance and critical illness policies in 2023.

1.2              Summary: OneFamily and the Lifetime ISA

The Lifetime ISA is a powerful democratising tool that is helping people, throughout the income scale, to achieve their goals.

OneFamily entered the LISA market in 2017 (the same year the product launched). Our LISA customers come from both direct sales and CTF customers attaining maturity.

Of those making regular payments into their Lifetime ISA products, the most popular level of monthly savings is between £25 and £50 per month, with more than half of all direct debits being between these values. UK Average Weekly Earnings-total pay is £705, or £2,820 per month, before tax.[1] One of our savers putting £25/month into their LISA is contributing under 1% of their gross earnings.[2] This is reflective of the low price point we have implemented to ensure our product is accessible to lower-income cohorts.

OneFamily’s research 2024: Opinions on Lifetime ISA and its features, and more general research around goals-based savings products.

In February 2024, we conducted opinion research with Opinium[3] to better gauge public understanding, and use, of LISAs. We found that, of the 2,000 people we spoke to, 8% already held a Lifetime ISA, of which 82% were aware of the £450k property purchase price cap, confirming that this is a feature they were aware of when purchasing the product – it could also indicate that this is a subject which is a concern for these LISA holders (see table below).

Overall, of the 92% without a Lifetime ISA, 70% of them said they would consider taking one out - when made aware of the product. This positive sentiment was spread consistently through all age groups. This suggests that there is latent demand for Lifetime ISA products and that the product would benefit from greater levels of awareness.

In separate research we asked more generally about people’s opinions on goals-based savings products like Lifetime ISA. Overall, we found that 37% of people were more highly motivated to save if the product had a specific goal, when compared to using a more general savings vehicle like an ISA.

More importantly, this figure rose to 52% amongst the 18-34 age group – the core market for the Lifetime ISA. As such, this research implies that the product concept is a sound one to achieve its house purchase goal.

Additionally, based on OneFamily internal data, we have found that the average value withdrawn for a house purchase has been £13,500 (equivalent to a 5% deposit on a £270k house), this is in line with the average house purchase withdrawal values seen across the market, and £270k is broadly aligned with the average first time buyer house purchase price in the UK, which suggests that the LISA product is appealing to mass market middle earners.

In summary, this data supports our view that the Lifetime ISA is an attractive and effective vehicle for working people to purchase their first home.

Recommendations covered in this submission include:

-          Retain the Lifetime ISA but focus on the house purchase outcome – positioning age 60 access as an “off-ramp” for those who don’t manage to purchase their first home with the LISA.

-          We advocate moderate reform of the withdrawal penalty potentially providing a limited allowance that would attract a 20% withdrawal charge for emergencies.

-          We believe that the £450k house price cap should be index linked as a minimum, or ideally completely removed.

-          The existing annual allowance of £4k is adequate for ordinary people to achieve their house purchase goals.

-          We believe enhancing the Lifetime ISA by extending it back to birth, replacing the Junior ISA would make the product truly “lifetime”, and deliver a simplification of the ISA regime. Additionally, extending the Lifetime ISA to other life events that deliver value for the government, for example, returning to education, birth of a child, upgrading homes to make them more energy efficient, could make the LISA an even more valuable tool for delivering on policy objectives.

The research we have cited demonstrates that there appears to be untapped demand for Lifetime ISAs among young adults. With a reboot of the LISA, as we set out in this paper, a good product can become even better. LISA providers, confident in the longevity of the rebooted product, can boost awareness, engagement, and focus – delivering greater financial resilience and more home ownership.

Section 2. Our Responses

For reader ease we have simply provided answers for each question in line with the order outlined in the call for evidence.

2.1              Is the LISA fit for purpose in its current design, including as a combined product for house purchase and pension saving?

The product is broadly suitable for house purchase and, with refinements, could operate even more effectively. We do, though, see fundamental challenges as a retirement savings vehicle.

The underlying product concept - of extending and building upon the ISA “brand” - to allow customers to reach specific financial goals, is a sound one. We believe that LISA is an elegant solution for the state and the individual to work together to achieve positive social outcomes, in this case the purchase of one’s own home.

Some fundamental challenges arise when considering the interaction between pensions and LISA’s “later life” component. For example, higher rate taxpayers receive higher levels of state support when saving into a pension (tax relief at the higher rate vs 25% bonus). In addition, many employees benefit from their employers’ matching contributions, in which case the better product outcome is for customers to choose saving into a pension.

The benefits of LISA as a later life savings vehicle come within specific cohorts of the population – i.e. self-employed people paying the basic rate of income tax and PAYE employees without access to employer contributions. These circumstances can result in a difficult decision for ordinary savers, without the benefit of advice.

Resolving the (house-purchase) issues above could create an even more effective product as we believe these issues have hamstrung the growth of the product, given the understandable questions that this complication drives for both customers and providers. The later life component of LISA could become an “off-ramp” for the product that would be used if an individual never achieved the goal of buying a house, but the main positioning would be as a tool for home purchase.

2.2              How well do consumers transition between using the LISA as a product for house purchase, to then a product for pension saving?

One Family’s customers typically target a house purchase.

Due to the immature nature of the product (in terms of the typical first home deposit savings cycle) we unfortunately do not yet have the volume of data to analyse customers’ savings activity after they bought their house.

2.3              Given its policy purposes, is the LISA value for money for the Government?

LISA provides value for money; just under a quarter of a million people have used their LISA savings to purchase their first home.

At the heart of the government’s strategy to grow the economy is housing, as set out by the Chancellor in her letter to the FCA last November:

“Reinforcing financial inclusion and supporting home ownership to enable individuals to access the financial services and products they need to fully participate in the economy, including the government’s commitment to making home ownership more accessible by fixing the planning system and building 1.5 million more homes, and supporting first-time buyers who struggle to save for a large deposit”.[5]

OneFamily data shows that our LISA customers (age 28), who are accessing their savings to fund their house purchase, are younger than the national average (age 34)[6].

Nationally, HMRC data shows c.£850 million ‘total withdrawals’ in 2023-24[7]. In total 56,900 account holders withdrew from their LISA to purchase a first-time property in 2023-24, a slight increase on the previous tax year. The average withdrawal value for a house purchase was £14,927, which we compared to OneFamily’s data, and found that the average value withdrawn for a house purchase has been £13,500 – the equivalent of a 5% deposit on a £270,000 house[8].

Using HMRC data, 227,600 individuals have withdrawn from their LISA for a house purchase, and cumulatively, the value of those withdrawals is slightly more than £3 billion.

Assuming a similar run rate of 57,000 new house purchases each year, the scheme will have a helped another 342,000 people save for a first home by the end of the 2029-30 tax year – giving a total of just under 600,000 people benefitting from Lifetime ISA by the end of the decade (all achieved without application of the value adding changes to the current scheme as recommended in this submission).

The first LISA retirement withdrawals will not happen until 2037, so withdrawal numbers are only related to house purchases[10].

As a government committed to supporting home ownership for younger people, the LISA is a powerful tool. The LISA scheme is popular with consumers, shown in the table below.

The average subscription values show annual savings in the order of one month’s average gross income, which gives an indication of how challenging saving for a house is for working people.

2.4              Is the LISA a suitable pension savings product?

The Pensions Act 2008, delivered by the last Labour government, defined a new model for retirement savings in the UK and auto-enrolment is a general success. Auto-enrolment provides an effective mechanism for the state, citizens and businesses to work together to secure positive economic and social outcomes for people who are retiring.

The variant of LISA implemented in 2011 has unnecessarily complicated the landscape.  Having said that, the product’s simple tax treatment (relative to pensions) does work, as does the value it has for specific population cohorts: self-employed basic rate taxpayers and employed basic rate taxpayers (without access to employer contributions).

As we mentioned in 2.1, we recommend that policy should be tightened to focus on house purchase only. Some kind of later life access should be retained so that customers have an “off-ramp” for the product that would be used if the account holder did not buy a house, but the main purpose of the LISA should be as a tool for home purchase.

2.5.               Should the LISA be abolished?

No.

The LISA is an essential enabler for young people in the UK to achieve financial resilience and independence, it is delivering an outcome aligned with Government priorities and it would be perverse to remove a product regime into which government and providers have invested and built a national “brand”. This is not to say that there is no room for improvement - and we have explained elsewhere in our submission why we think this is not the case - but to move from that position to an overall removal of the proposition would be an over-reaction.

Rachel Reeves has clearly stated, for example in her recent communication to the FCA[12], that the government holds a clear ambition to encourage home ownership (see 2.3), and the LISA, benefitting from the strength of the ISA brand, is a great vehicle to help achieve this target.

Supporting this view, our own research suggests that goals-based savings vehicles (like the LISA) provide a compelling proposition for people and result in higher levels of savings.

In addition to the above figures which are blended across multiple age groups (18-55+), 1 in 2 people (52%) aged 18-34 - therefore of Lifetime ISA age - said they would be more likely to save for their first home with a targeted savings product when compared to using a general savings product.

Our own experience of the LISA as a vehicle for saving for a new home is positive. As covered in 2.3, the average age at purchase has been 28 (compared to the national average of 34), and the product is appealing to a broad range of people.

Across the market, the product has enabled 227k people buy their first home and has the potential to achieve much more.

The product already has a degree of awareness amongst target customers and has the potential to become more broadly used by providers if some of the key issues highlighted in this call to evidence are remedied. We should build on this awareness, rather than discarding the knowledge, reputation and financial industry investment associated with LISA.

The research we carried out with Opinium in February 2024 showed that of the c.1,800 respondents without a Lifetime ISA, 70% would consider one when made aware of the product[14], indicating a latent demand for the product should awareness build beyond current levels.

Home ownership is important, as the Chancellor pointed out in her letter to the FCA, to enable individuals to fully participate in the economy and by extension, is a potential means to support the retirement income of future generations. Home ownership remains a rite of passage for most young working people in the UK today; “Some eight in 10 members of Gen Z, also known as Zoomers, want to buy a house – but they face the “biggest gap between housing aspiration and reality” of any generation”[15].

The average time it takes the typical adult to save for a deposit varies depending on where one lives, but the data demonstrates that this will usually take more than five years[16]. As such, the LISA can also be an engine for economic growth, introducing more young people to investing and driving additional money flows into UK PLC as a result, via the natural distribution that some of the investment funds will hold in UK assets[17]. Where LISA contributions are saved into cash products, this supports lending for growth and house purchase from banks and building societies and strengthens the balance sheets of those institutions in turn.

LISA can support the Treasury and Cabinet Office’s goal of doubling the UK mutual sector. The mutual sector has been a staunch and loyal supporter of Government sponsored tax efficient savings products over the years, and LISA is no exception with over a third of the providers being mutuals (including but not limited to OneFamily, Met Friendly, Unity Mutual, Skipton BS, Nottingham BS, Bath BS).

The mutual sector is a strong supporter of the Child Trust Fund; since September 2020, the LISA has been a key route for young adults on their savings journey, it being a key destination for maturing CTF money. This will continue to be the case for the Junior ISA product.

In summary, the LISA not only delivers on key government objectives, but it also helps young people both build a savings habit for life and get a foot on the housing ladder. Property ownership, in turn, builds financial resilience by providing an asset that should grow in value over the long-term, removing older people from exposure to unaffordable rental markets in later life[18].

For the Mutual sector to provide simple, inclusive, and affordable products for traditionally marginalised segments of the population, the sector needs certainty of long-term government treatment of financial products. 

The Child Trust Fund was closed in 2010 as an austerity measure by the Coalition government, with the promised additional vouchers at age 7 and 11 remaining unpaid, only to be replaced by the Junior ISA in the following year. This break in continuity has had an impact on the market for customers and providers.

Our call centres have heard strong expressions of disappointment from families whose first child benefited from CTF but whose second child did not qualify for a government voucher, instead qualifying for the Junior ISA. We are concerned that this has only served to fuel cynicism about financial products.

For tax efficient savings schemes to be successful people need to understand them, and to achieve that we need a period of stability and consistency.

2.6              Should the LISA be reformed to remove the withdrawal penalty?

We advocate moderate reform.  

A lower withdrawal charge is a practical way for customers to access emergency savings and may help younger customers who fear short-term savings being locked away.

Some customers may not understand that the effect of a 25% charge does not equalise with the 25% bonuses if the capital invested has not grown. In turn, this creates tensions with the priority that FCA has placed on Consumer Understanding, during the implementation of the new Consumer Duty since 2023.  

At the same time, we recognise the potential government dilemma here. The withdrawal penalty was set at 25% (rather than 20%) for obvious reasons – to avoid people using the product for general savings purposes (benefitting from additional growth / interest on the government bonus element before exiting) and as a result delivering less value for money for government.

We suggest a compromise position where the withdrawal policy could be built on the following three principles: 

1. Emergency withdrawals, to manage financial shocks, could attract a 20% charge and be capped up to a set amount (for example £750)
2. Outside of emergency withdrawals, the charge would remain at 25%; and additionally,
3. Communications standards could be introduced around charge disclosure, both pre-sale and at the point of withdrawal, to allow customers to better understand the non-equalisation point attached to the 25% charge element.

We recognise that these proposals would demand careful review and design. The costs and disruption of introducing a partial exception, in line with the idea above, to existing provider processes, and to interactions between those providers and HMRC (for example around reporting and reconciliation) would be material.

2.7              Should the LISA be restricted to those with no access to a workplace pension? 

We have also addressed this issue in section 2.1.

Promoting LISA as a retirement savings vehicle while restricting it to self-employed people, for example, would be problematic. It could be complicated (for example issues around individuals moving between self-employed and employed workstyles), as well as being difficult to police. 

Neither would this proposal address the question of basic rate taxpayers who are not enjoying top-up pension contributions from their employer, as outlined in Section 2.4. As things currently stand, this customer cohort enjoys a subset of limited benefits from LISA; namely the product is more liquid than a pension in that cash can be accessed prior to retirement (albeit subject to a penalty), which is a good feature for basic rate taxpayers who are more subject to financial shocks.

Another point to make here is that it leads to another design limitation from the version of LISA introduced by the coalition government. As we outline above, this question does point towards the potential appropriateness of LISA for self-employed individuals. However, this utility is limited in real world terms, given the age restriction on subscriptions above 50 and the fact that the average age of self-employed people in the UK is 48[19].

Finally, this proposal would also seriously limit who could benefit from (what most people see as) the main purpose of the product – first time buyer house purchase.

As such, we think that the option we outline in Section 2.1 supports better outcomes – i.e. to primarily focus the product on house purchase, using age 60 as an “off ramp” for those that did not manage to achieve that goal.

2.8              Should the LISA house price cap be raised in line with inflation, or removed?

We advocate, as a minimum, adjusting the cap such that it moves in line with house price inflation and is annually reviewable.  

We believe this is reasonable given that HMT now has a greater dataset with which to model any cost risks associated with LISA bonuses, and that this cap was originally designed to control.  

We have previously strongly advocated for reform of the cap, given the level of uncertainty it brings to the ultimate product outcome, again where we see interplay with Consumer Duty considerations. In an ideal world we believe that absolute removal of the cap would be optimal, but we also recognise that a move as radical as this may not be feasible in the current economic and political climate. 

2.9              Should the annual LISA limit be raised from £4,000?

We do not believe an increase in the current limit is strictly necessary.

The Lifetime ISA is working, but we believe it can work even harder for the government. As discussed in section 1.2, our research suggests that there is significant un-tapped demand for the Lifetime ISA product, and we believe the key to unlocking this lies in the other product features detailed in this submission.

Of those making regular payments into their Lifetime ISA with OneFamily, the most popular level of monthly savings is between £25 and £50 per month, with more than half of all direct debits being between these values. In the 2023-2024 tax year less than 5% of all our Lifetime ISAs maxed out the £4,000 allowance[21], which aligns with the age and economic profiles of our customers.

Building out from existing success will be more dependent on engaging with a higher volume of ordinary working people than providing further encouragement for those higher income segments who are able to contribute more than the existing limits. Our view here is also informed by the current financial constraints within which the UK is operating.

In summary, we believe the existing limits are probably sufficient to help the people that most need this kind of support to achieve their home ownership aspirations. 

2.10              Should the LISA be reformed in any other way?

LISA is a product framework that allows government to incentivise a variety of social and economic behaviours, through rewarding a person’s saving choices at particular points in their lives. The core concept of “life-stages” could be applied to other points in the lives of consumers, including the birth of a child, returning to education, or even modernisation of homes to achieve environmental sustainability goals. In this enlarged concept, the incentive system could vary to encourage families to address their life-stages in a particular way.

The LISA could also be extended “back to birth” to replace the Junior ISA while still offering the government’s bonus to top-up contributions from family, as well as a CTF-like voucher system for families with lower incomes.

In summary there are further applications that can be considered by government and the financial industry together that will build upon the work and experience that has already been achieved. As part of our opinion research, we also asked people why they would not consider a Lifetime ISA. This paper has addressed many of the issues below and we thought it helpful to share the data with the Committee.

February 2025