A committee of MPs have warned the Government that reforms to the Lifetime ISA (LISA) still fall short, describing the product as “confused” and potentially harmful for some savers. The Treasury Committee has repeatedly raised concerns about the scheme, which allows under-40s to save up to £4,000 a year towards a first home or retirement, with the Government adding a 25% bonus worth up to £1,000 annually.
Withdrawals are allowed to buy a first home up to £450,000, from the age of 60, or in cases of terminal illness. Other withdrawals face a 25% charge. In its latest report, the committee said that despite repeated warnings, ministers have failed to set out a clear reform plan.
It said LISA savings should either be treated the same as pension savings in the Universal Credit means test, or the product should carry a warning that opening one could disadvantage claimants.
The committee said the Government’s willingness to consider including such a warning is welcome but falls short of a concrete commitment.
Concerns were also raised that the LISA’s dual purpose – retirement saving and home-buying – was pulling people away from more suitable products. While the Government has pledged to work with providers on clearer messaging, it has not explained what changes that would involve.
Committee chairwoman Dame Meg Hillier said: “The Government has taken some steps towards improving the Lifetime ISA, but I do not believe they have gone far enough. The Lifetime ISA is a confused product that requires reform.
“Recently published research by HMRC based on a sample of LISA holders found that 87% of those who had used their LISA to buy their first home said that they could have done so without their LISA. Given that the LISA is forecast to cost the Government £3billion over the next five years, this raises the question of whether the LISA is a good use of taxpayers’ money.
“The Government has an opportunity at the Budget to think again on the LISA for would-be first-time buyers and those saving for retirement alike.”
In its response, the Government insisted it is “committed to making ISAs, including Lifetime ISAs, as simple and flexible as possible”. It said that more than 1.3 million accounts were open in 2023/24 and that 227,600 people had used the LISA to buy a first home since 2017.
It said: “To ensure the product is well targeted, the property price cap (£450,000) supports most first-time buyers across the UK, including those households who may find it difficult to get onto the property ladder.”
It added that the 25% withdrawal penalty was necessary to ensure the product is used for its intended purpose.
On Universal Credit, it said: “We will work with industry and other Government departments to consider ways to improve the messaging about the implications of savings and investments might affect entitlement to universal credit.”
A Treasury spokesperson added: “Across the vast majority of the country and in most London boroughs, the average price for a first-time home remains below the £450,000 Lifetime ISA cap. We are also committed to building 1.5 million more homes so that people can turn the dream of owning a home into a reality.”
