The UK’s Lifetime ISA system is causing people to lose money, say MPs
The Lifetime ISA’s (LISA) dual-purpose design may be diverting people away from more suitable products and putting part of their savings at risk. This is according to a new report by the Treasury Select Committee published on Monday (30 June).
MPs found that the LISA’s objectives to help people save for both the short and long term make it more likely that consumers will choose unsuitable investment strategies.
Cash LISAs may suit those saving for a first home, but may not achieve the best outcome for those using it as a retirement savings product, as they are unable to invest in higher-risk but potentially higher-return products such as bonds and equities.
In its report, the Committee said the current rules penalise benefit claimants as ‘nonsensical’ and found that it is possible that LISAs have been mis-sold to people who are eligible for Universal Credit or Housing Benefit now or in the future.
Under the current system, any savings held in a LISA can affect eligibility for Universal Credit or Housing Benefit, despite this not being the case for other personal or workplace pension schemes.
The Committee found that, if this isn’t changed, the LISA should be clearly labelled as an inferior product to those who may at any point in their life be eligible for such benefits.
Another issue raised by the Committee is the 25% charge for withdrawing funds due to unforeseen circumstances. This charge means that, as well as losing their bonus, LISA holders who need to make an unplanned withdrawal face losing 6.25% of their own savings. As a result, customers are left with less money than they originally deposited.
In the 2023-24 financial year, almost double the amount of people made an unauthorised withdrawal (99,650) compared to the number of people who used their LISA to buy a home (56,900). This should be considered a possible indication that the product is not working as intended, the Committee said.
“The Committee is firmly behind the objectives of the Lifetime ISA, which are to help those who need it onto the property ladder and to help people save for retirement from an early age,” said Chair of the Treasury Select Committee, Dame Meg Hillier.
The question is whether the Lifetime ISA is the best way to spend billions of pounds over several years to achieve those goals, she said.
“We know that the government is looking at ISA reform imminently, which means this is the perfect time to assess if this is the best way to help the people who need it,” said Hillier.
“We are still awaiting further data that may shed some light on who exactly the product is helping. What we already know, though, is that the Lifetime ISA needs to be reformed before it can genuinely be described as a market-leading savings product for both prospective homebuyers and those who want to start saving for their retirement at a young age.”
