Written evidence submitted by Hargreaves Lansdown

About Hargreaves Lansdown and LISAs

Hargreaves Lansdown’s purpose is to make it easy for people to save and invest for a better future. We provide a lifelong, secure home for people’s savings and investments offering value and support, making their financial life easy. Over 1.9 million clients trust us with £157.3 billion (as at 30 September 2024) making us the UK’s number one platform for private investors.  We take a holistic approach to considering personal finances and the role of investment to support longer term financial resilience.

We offer the full range of tax wrappers including Stocks and Shares ISAs, Cash ISAs, Junior ISAs, Lifetime ISAs and Self Invested Personal Pensions.  In addition to our investment platform and our cash savings platform, we provide a workplace pensions scheme to over 500 employers and have a financial advice business.

We have supported a Lifetime ISA from launch in 2017.  HL only offers an investment LISA.  Currently over 148,000 clients hold a LISA with us.  To date more than 20,000 clients have withdrawn money from their LISAs to purchase a property.  Numbers holding a LISA for later life are smaller however, client feedback has suggested that this is a common use-case both from the outset and the in combination with house purchase.  However, given the product is only open for people up to the age of 40, and most will be saving for retirement in their workplace pension, it is perhaps too early to judge the product’s usefulness for that group.  We highlight the benefits of holding a LISA over a pension for those who want to make contributions in addition to their workplace pension.  it is particularly beneficial for basic rate taxpayers in this group.

We have completed in depth analysis of the potential for the use of the LISA as a vehicle for self-employed basic rate taxpayers to save for retirement in September 2023.  We think this is one of the biggest potential uses for the LISA and one which could have a big impact on financial resilience.  Our research shows that:

• In 2022 Q4, self-employed led households[1] had a lower average level of financial resilience compared to those led by an employee. Specifically, according to the Barometer, the former’s average score was 52.9, significantly lower than the latter (67.1). Inferior pension adequacy was one of the primary factors explaining this gap.
• Across household types, there is significant variation between their ‘plan for later life’ scores indicating differences in their expected financial resilience upon retirement. Notably, self-employed led households had an average pillar score of 46.1, nine points lower than the average for employee led households.
• Expanding access to the Lifetime ISA for households aged between 40 and 55 could affect 680,000 households with a self-employed worker who pays the basic rate of tax. Of this group, approximately two-thirds were households where the primary earner was self-employed.
• Further, the reduction of the withdrawal penalty could benefit 540,000 households aged between 18 and 39 with a self-employed worker who pays the basic rate of tax. 400,000 of these households are self-employed led, while a further 140,000 households are where the self-employed is a secondary earner.
• Those paying the basic rate of tax are particularly vulnerable in terms of retirement financial resilience. Of this group, just 14.9% of self-employed led households aged between 18 and 39 are on track to have sufficient savings that would provide them with a moderate standard of living upon retirement[2]. This share is only slightly higher for those aged between 40 and 55 (21.9%). The scores for homeownership and other assets similarly underperform for these groups. This suggests a clear rationale for policymakers to seek to identify measures that would enable these households to plan for their retirement more effectively.

This analysis is based on HL’s Savings and Resilience Barometer model which we have developed with Oxford Economics.  We seek input from Government departments, regulators, think tanks, the University of Bristol, industry and charities on the methodology behind our approach which considers how debt, savings, protections, saving for later life and investment all impact household financial resilience.  The analysis and methodology behind our thinking is available online.  We would be more than happy to discuss the approach in more detail if you would like more background.

Call for evidence: responses to questions

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

Yes – LISAs offer extra support to first time buyers to help them build up a deposit for their home.  This kind of targeted savings and investment vehicle helps people make regular contributions for an aim, hopefully starting a habit which lasts a lifetime. 

The option to reserve funds for income in retirement is a different purpose and not one which is well used at this stage.  But that’s not to say this area doesn’t have a role to play.  There are various ways in which we think the product could be improved:

Improvements to support self employed retirement saving:

• We have proposed that it would become more suitable if we:
• Increased the age that anyone can open and pay into a LISA until age 55.
• Reduce the withdrawal penalty for any self-employed LISA holders accessing before age 60 to 20%. This acts to recover the government bonus but ensures those needing to withdraw early are not additionally penalised.
• Allowing for early access if needed would overcome a significant hurdle the self employed face when deciding to put money away for the long term despite the precarious nature of their income. 
• For simplicity the change in the age rule could apply to all – not just the self employed.  This would also help people who move in and out of being an employee and being self employed.  The reduced penalty for early access could be recouped within a self employed tax declaration, to ensure that this benefit is only accessed by those with self employed status.
• Our analysis from 2023 showed that with these changes more than 1.2 million households with a basic rate tax paying self-employed earner could benefit.
• The changes would also make the Lifetime ISA more relevant to the self-employed, 70% of whom missed out on the Lifetime ISA because they were too old when it launched in 2017.

Improving the LISA for house purchases

• The current house price cap has not moved in line with house prices.  People investing for house purchases may not know, when they begin saving, if they are purchasing their home as an individual or a couple.  This could have a big impact on the value of the property that is purchased.
• A potential way of ensuring that long terms savers and investors aren’t at a disadvantage unexpectedly because of rises in the housing market could also be to reduce the penalty to 20% in cases where someone makes a purchase above the cap.

Boosting the use of the LISA for later life savings

• Lifting the age for subscription would also boost the use of the LISA for later life savings.  People are more likely to have additional spare money as they age and pay off commitments like mortgages and the costs of bringing up children.
• If they have maximised any matched employer contributions in their workplace pension scheme, the LISA could provide an alternative product for additional investments for later life.  The structure of the LISA would allow for an additional boost to extra savings for basic rate tax payers. 
• However with the current age cut off the LISA is less likely to be used for this purpose, unless someone opened a LISA before 39 and kept it open for this purpose.

Simplifying the LISA

• An alternative wider approach to reducing complexity would be to reduce the withdrawal penalty for all rather than just the self employed and those purchases homes above the housing cap.  The Exchequer should absolutely be able to recoup costs if the bonus is not being used for a home purchase or for income in retirement.  Reducing the penalty to 20% would allow for this without penalising the saver. 

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

As the product was launched in 2017, there hasn’t been sufficient time for a significant number of clients to purchase their first home and return to begin using the product to save for retirement.

HL client research has shown that a proportion of our client base are using the product for both house purchase and retirement from the outset, and there is also evidence of clients re-opening their LISA following their first home purchase.

Those saving for a house purchase are likely to also be saving into a pension through automatic enrolment. However, there is an increasing self-employed population that would benefit from having a flexible retirement option.

As discussed above there is not a great deal of usage for later life saving within a LISA at this stage, but this is most probably for the reasons discussed in response to question 1.

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

The latest statistics show from HMRC show 755,000 LISAs were paid into during the tax year 2022/23 with £1.87 billion was contributed.  The average paid in was £2,478 which shows that the product is not simply being used by the wealthy maximising their tax wrappers.  56,900 people used their LISA to buy a home in 2023/24, – up 1,150 in a year. They withdrew an average of £14,927.

Home ownership is particularly important to build resilience in retirement.  HL’s Savings and Resilience Barometer reveals in January 2025 that 47.3% of outright homeowners are on track for a moderate retirement income.  This is compared to just 15.5% of renters.

The LISA is one of the few forms of support for helping people onto the property ladder.  This results in long term value to individuals but also builds a savings and investment culture, encouraging people to think of the long term as well as more immediate needs.  Greater resilience in retirement reduces costs on the state, not least with respect to the cost of social care.

4. Is the Lifetime ISA a suitable pension savings product?

Yes – especially for basic rate tax payers and the self-employed. The Lifetime ISA provides self-employed individuals with the equivalent of basic rate tax relief whilst maintaining a degree of flexibility to support potentially variable and inconsistent income.

5. Should the Lifetime ISA be abolished?

No – the LISA is clearly meeting needs of young savers and investors aiming to take the increasingly difficult first step on the property ladder. It also provides a clearly valuable retirement option for self-employed individuals across the UK. However we think consideration should be given to how best to improve its use. 

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

The withdrawal penalty in the LISA is a barrier to using this product.  The Exchequer should absolutely be able to recoup costs if the bonus is not being used for a home purchase or for income in retirement.  Reducing the penalty to 20% would allow for this without penalising the saver. 

HL observed a small uplift in unlisted withdrawals during the reduction of the withdrawal penalty in 2020, however we believe that this was linked to the macroeconomic and employment environment at the time. This is supported by client behaviour being reasonably unaffected by the reinstatement of the 25% withdrawal charge.

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

No – this removes its utility as a product for first home purchase for the majority of users and undermines its role in the retirement market. It would be administratively difficult to police both at the point of application and as a client’s circumstances change over their life.  For the employed the LISA should be seen as a product for additional retirement saving, for the self employed it could be a primary retirement saving vehicle.

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

If the LISA house price cap is to be indexed, it should be indexed against house prices rather than inflation. 

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

The LISA limit has remained at the same rate since launch in 2017. In this time, according to ONS data[3] house prices have grown by more than 28%.

If LISA and ISA limits are to be considered, we would be supportive of the LISA limit sitting outside of the ISA limit, simplifying it for providers and savers/investors and increasing the total amount that people can save in ISAs.

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

See our response to question one for potential reforms.

February 2025