LISA0196
IPSE is the UK’s only not-for-profit membership organisation dedicated exclusively to the self-employed, offering them resources, protection, a community, and a voice. We represent all self-employment, whatever the occupation or legal form. We campaign for a future where self-employment is recognised as a cornerstone of our economy, and where fair treatment and essential support are accessible to all.
IPSE is grateful to the committee for opening this inquiry into the Lifetime ISA and for the opportunity to respond.
Across government and the financial services sector, there is a widely understood need to improve retirement outcomes for the self-employed, one of several ‘underpensioned’ groups. As the representative body for the self-employed, one of our core campaign focuses is to push for changes to reverse this trend, and our interest in the Lifetime ISA is in its potential to play a role – alongside many other changes – in doing this.
We have therefore opted to respond only to questions which are directly relevant to this point, and to which we can provide sufficiently useful information for the committee’s consideration.
No – abolishing the Lifetime ISA would remove an almost ideal savings option for the self-employed – especially basic rate taxpaying sole traders – a group which is ‘underpensioned’, or overly-reliant on the state pension.[1]
For basic rate taxpayers in self-employment, saving into a Lifetime ISA may be preferable to a pension. Whilst higher rate taxpayers benefit from higher rates of tax relief when saving into a pension, basic rate taxpayers do not. For employees, the benefit of employer contributions means this relative tax inefficiency can be overlooked.
But for the self-employed, there are no employer contributions to benefit from, weakening the pension proposition relative to the Lifetime ISA – which is bolstered by a 25% government-backed bonus – even further.
Yes. Of the total early withdrawal charge of 25%, only 5% is truly a ‘penalty’. The remaining 20% is the removal of bonuses, which are no longer valid in an early withdrawal scenario.
The penalty is designed to encourage savers to keep funds committed to the product, supporting the Lifetime ISA’s overall function as a means of saving for first home purchases and/or retirement.
However, for self-employed savers, we believe the penalty acts as a barrier to entry, rather than an incentive to keep funds committed. This is primarily due to self-employed professional’s stronger preference for financial flexibility and liquidity to guard against volatility, and an aversion to being penalised for this.
Overdue invoices, client failure and unplanned expenditure are just some of the contingencies that the self-employed financially prepare themselves for. A cash savings buffer is the immediately obvious strategy to guard against these income shocks, but this precludes those funds from contributing toward later-life saving.
If funds could be withdrawn from a Lifetime ISA without penalty, the self-employed would likely feel more confident about committing more of their income to the product.
In answering this question, we have understood it to mean that a Lifetime ISA could theoretically be accessible only to those not currently enrolled in a workplace pension scheme with a current employer.
We do not see a compelling reason to do this. Making the Lifetime ISA only accessible to those not currently paying into a workplace pension would not necessarily increase uptake by this group. The self-employed are a significant bulk of them; at the time of the Lifetime ISA’s introduction in 2018, 70% of the solo self-employed were immediately excluded on the basis of age, being aged 40 and over.
Very many self-employed people will have existing workplace pensions from previous employment – it would be wrong for this to preclude them from then saving into a Lifetime ISA upon taking up self-employment.
Furthermore, it would be potentially harmful for employed individuals who have a secondary self-employed income, of which there were 460,000 in 2024,[2] especially if they are employed only on a part-time or part-year basis.
Beyond abolishing the withdrawal penalty, IPSE backs two further reforms proposed by Hargreaves Lansdown in its report ‘Self-employed financial resilience – September 2023’:
At the time of Hargreaves Lansdown’s analysis in 2023, it was estimated that 450,000 households where the primary earner is self-employed and pay a basic rate of tax would benefit from these reforms. An additional 230,000 households would benefit when the secondary earner is self-employed and pays a basic rate of tax.[3]
The existing age restrictions mean that, for 70% of the entire solo self-employed sector, a Lifetime ISA is totally out of reach. Of the freelancers surveyed by IPSE in 2021, 46% said that they were saving into an ISA at that time – but only 6% said they used a Lifetime ISA.[4]
For the small number of individuals who had a chance to open one before turning 40, the cut-off point for additional government bonus payments at age 50 still greatly weakens the Lifetime ISA’s potential to be an effective later-life savings product. In fact, nearly half (47%) of the UK’s 4.2 million self-employed[5] are aged 50 and over, including 21% aged 60 and over, up 1% in 2024.
February 2025
[1] Now: Pensions & Pensions Policy Institute, The underpensioned index 2022
[2] IPSE, The self-employed landscape in 2024 (based on ONS Labour Force Survey data for Q2 2024)
[3] Hargreaves Lansdown, Self-employed financial resilience - September 2023
[4] IPSE and CMME, Freelancers’ financial wellbeing: Understanding experiences of savings, pensions and mortgages in 2021, page 8
[5] IPSE, The self-employed landscape in 2024 (based on ONS Labour Force Survey data for Q2 2024)