LISA0194                           

 

Written evidence submitted by the Association of British Insurers (ABI)

 

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Executive summary

 

The Association of British Insurers (ABI) are supportive of an ISA simplification agenda that can reduce the barriers to retail participation in UK capital markets.

 

Most pressingly, the government and regulators should:

 

While the LISA is a relatively complex product in the ISA landscape and will often be less effective as a retirement saving vehicle compared to a personal pension or self-invested personal pension depending on individual circumstances), it does have clear benefits for consumers looking to buy a first home. It can help build a savings habit given that it is geared toward a specific life goal particularly as the bonus is often paid-in monthly, which provides clear and regular motivation to continue saving.

 

Therefore, we recommend that the government considers changes to LISAs to reduce the complexity of the product. In our submission, we focus on changes to improve the help-to-buy aspects of the product, as having a clearer objective for the product will also simplify it.

 

The government should consider the advantages and disadvantages, including fiscal impacts, of the following changes:

 

These are long-term products, and a long-term strategy is needed to provide confidence for industry and consumers. LISAs sit as part of the long-term savings environment, with pensions being the primary mechanism. Constant tweaks to the existing pensions and savings system are not helpful. We think phase two of the Pensions Review will be the most appropriate place for the government to consider the options available to consumers to achieve adequacy in retirement, including LISAs. The involvement of HM Treasury (HMT) with the Review provides an opportunity to consider these products in the round. Therefore, we recommend the government holds off making any changes to the longer-term savings aspects of LISAs at this stage and instead consider this as part of the Pensions Review. It would be worth exploring further the interaction of house-saving and retirement-saving generally, and the transition within a LISA; data on usage and intentions of LISA holders (for home purchase or for retirement); and whether the off-ramp is effective as it is designed.

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

  1. The Lifetime ISA (LISA) is primarily a useful product for consumers looking to save for a house. The LISA is not a pension savings product as such, as we spell out in response to Q4, because it does not provide a pension income. We refer to it here as a long-term savings product for retirement (as well as for a home).

 

  1.   Our members’ main concern regarding the LISA is the unauthorised withdrawal penalty, which acts much like an exit charge. When considering it through the FCA’s four Consumer Duty outcomes, one could argue that the penalty reduces consumer understanding of the product (as it adds complexity), it represents poor value where a customer exits for reasons other than house purchase or retirement (e.g. financial hardship), and it reduces the likelihood of the product being fit for purpose (e.g. consumers may feel ‘locked in’ to a long-term savings vehicle if house purchase plans fall through).

 

  1.   The LISA has downsides as a long-term saving product for retirement, and there is added complexity from a consumer understanding perspective due to the dual objectives of the product. However, for a cohort of savers, a LISA may be a more desirable long-term savings vehicle than a personal pension, in particular for the self-employed that do not have access to the employer contribution in a workplace pension (see further details in response to Q4).

 

  1.   It is worth further exploration into the relationship between LISAs and pensions for different groups of consumers as part of the Pensions Review.

 


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?

  1. It is ultimately too early to say because the product has only been live for 7 years.

 

  1. From an administrative perspective, the transition is simple. Consumers do not need to take any action at the point when they realise or decide that they will not use the funds to purchase a house. Although in such situations, they may wish to switch providers or assets as their use transitions to a longer timeframe.

 

  1. It is worth exploring the extent to which consumers understand the rules regarding their LISA if they do not use the LISA to purchase a property and analysing data on customers’ usage of and intentions for the different purposes of a LISA.

 

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

  1. The LISA may provide value for money given the policy goal is to support homeownership. The LISA includes an incentive to save for a home, and it certainly helps those individuals who benefit from that incentive.

 

  1. But it is likely to benefit those who already have access to wealth; and without wider changes, especially an increase in housing supply, it will not help overall housing affordability. The solution to this is to address the supply challenge, as the government has pledged to do.

 

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

  1. The LISA is not a pension savings product as such, as it has no mechanism to provide a pension income. This is an important distinction between the LISA and pension products, which are subject to extensive Department for Work and Pensions (DWP) legislation, codes and guidance from The Pensions Regulator (TPR) and/or a separate section of rules in the Financial Conduct Authority (FCA) Handbook covering governance, charges, communications and processes for choosing a pension income.

 

  1. The LISA has downsides as a long-term savings product for retirement because:
    1. contributions are capped at £4,000 per year;
    2. one cannot contribute into a LISA past the age of 50;
    3. it enables early withdrawals (with a penalty) which may be tempting for individuals but not necessarily conducive to long-term saving;
    4. and it also enables the entire amount to be withdrawn tax-free at 60, with no option for a retirement income.

 

  1. For employees with the capability to save for the long-term, it will almost always be appropriate to save first and foremost into their workplace pension to ensure they collect the benefit from employer contributions (including any matching available).

 

  1. For the self-employed, or for those looking to save in addition to their workplace pension, the suitability of a LISA will depend on individual circumstances. Generally, a LISA provides more tax relief for basic rate taxpayers (until the age of 50) given that withdrawals after 60 are tax-free, whereas only 25% of a pension (subject to a cap on total pension savings) can be withdrawn tax free at the age of 55 (rising soon to 57), and further withdrawals will be taxed at an individual’s marginal tax rate. Higher and additional rate taxpayers will generally receive greater tax relief from pensions saving, and non-taxpayers will see no difference.

 

  1. There are other factors like the age of authorised access (60 for LISA, currently 55 for pensions), the opportunity for early withdrawals with LISAs, and the range of assets available within LISAs vs personal pensions vs workplace that would influence an individual’s decision.

 

Question 5: Should the Lifetime ISA be abolished?

  1. No.

 

  1. While the LISA is a relatively complex product in the ISA landscape, and will often be less effective as a retirement saving vehicle compared to a personal pension/SIPP (depending on individual circumstances), it does have clear benefits for consumers looking to buy a first home. It can also be a desirable product to open instead of, or in addition to, a personal pension.

 

  1. Therefore, we recommend changes to LISAs to simplify the product, focusing on the help-to-buy aspect of the product, and do not believe it should be abolished. Its predecessor for first time buyers, the Help to Buy ISA has already closed to new customers.

 

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

  1. We understand why the penalty is included. A penalty encourages savers to keep their money in the product to achieve their saving goals. We are mindful that allowing customers to exit at parity with their contribution does leave the product open to customers who are not committed to using it for the intended dual-purpose. This might make it more difficult to forecast take-up and contribution levels and therefore cost, at least in the short term. 

 

  1. However, the penalty is unduly punitive as designed, given that there will be legitimate reasons where people do not end up purchasing a first home with the funds and need to access savings before retirement.

 

  1. It is worth investigating further, but the loss of the bonus itself may be a sufficient barrier to ‘illegitimate’ early withdrawals – if true, the penalty may have little impact as a deterrent. It also does make the product more complex and may contribute to a fear factor that prevents people from opening a LISA in the first place where they would otherwise benefit from one.

 

  1. One option for the government would be to lower the withdrawal charge from 25% to 20% - essentially removing the punitive aspect, and instead savers would simply lose the government bonus as they aren’t using the LISA to buy a house or for retirement. However, this would need to be balanced against the risk of consumers opening a LISA with no intention to use it for buying a house or retirement and recycling the returns on the government top-up.

 

  1. Another option would be to introduce a withdrawal amount that is exempt from the full 25% charge each tax year, e.g. £1,000. This would enable withdrawals at the lower rate of 20% for emergencies (up to £1,000) but reduce the risk of recycling and of increased early withdrawal behaviour inherent in the first option. There is a precedent for a similar approach to this in the existing UK tax treatment of investment bonds, where 5% of the investment can be withdrawn each year without incurring immediate taxation). However, this approach does arguably introduce even more complexity to the LISA.

 

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

  1. No. The primary reason people take out a LISA is to get help to buy a first home. This restriction would artificially tighten the target market, and exclude employed individuals, with a workplace pension, that wish to buy a first home.

 

  1. Unintended consequences of such restrictions might include:
    1. Higher rates of workplace pension opt-out by those with a preference to save for a home;
    2. Consumers being left with the impression that the LISA is the best saving option for self-employed individuals or others, which it may or may not be depending on their circumstances.

 

  1. It is not clear what ‘no access to a workplace pension’ means in this question. Self-employed people and people who are not in work can open their own pension, and lower earners are able to opt-in to a workplace pension.

 

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

  1. A one-off rise in the cap is likely warranted given historic inflation. The government should then consider a periodic review mechanism of the house price cap which would take into account house price inflation across the UK, including in London.
  2. Two other options to explore include:
    1. Removing the house price cap altogether.
    2. Indexing the house price cap to inflation, rounding as necessary. 

 

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

  1. Raising the LISA allowance would help savers purchase their first home more quickly.
  2. Given that the LISA allowance forms part of the overall £20,000 ISA allowance, the fiscal impact would be expected to largely be limited to the additional bonus payments for those individuals that would save more than £4,000 into their LISA each year. In deciding this, the government would need to consider the distributional impacts, i.e. who benefits from the change.

 

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

  1. The government could explore raising the age of eligibility to open a LISA (e.g. from 39 to 50) given housing affordability constraints – people are buying later given rising house prices.
  2. The government could also consider increasing the age cap on contributions (e.g. from 50 to 55) to similarly help toward first home purchases which occur later in life.
  3. These options need to be balanced against the risk of more customers borrowing at a later age, well into retirement.

 

 

February 2025