Lifetime ISAs should be reformed by cutting withdrawal penalties, scrapping age restrictions and lifting its property price cap, according to investment firms.
The part-home savings, part-retirement investment plan has become a “marmite” product appeals to some and not to others, but does neither effectively.
These comments come after the Treasury Committee launched a review last month into whether LISAs are “fit for purpose”. The MPs call for evidence ended yesterday.
Currently, the product allows people under 40 to open a LISA and put in up to £4,000 each year until they’re 50. At the end of each tax year, this is topped up by a 25% bonus from HMRC.
Savers are only able to withdraw their money from the account if they are either buying their first home, terminally ill with less than 12 months to live, or aged 60 and over. Withdrawal for any other reason comes with a 25% charge.
Since 2018, around 227,000 people have used the product to buy a property using over £3bn of LISA savings.
Quilter tax and financial planning expert Rachael Griffin says parts of the product are “outdated” and in need of reform.
Griffin says the scheme is “hampered by an excessive 25% withdrawal penalty, which unfairly reduces savers’ contributions alongside reclaiming the government bonus.
“Reducing this penalty would make the product fairer and more accessible, especially for those who face financial emergencies”.
AJ Bell head of public policy Rachel Vahey adds that, “removing age restrictions could significantly improve appeal to self-employed workers” as a retirement vehicle.
While most in the investment industry agree that the savings plan’s £450,000 property price cap should be raised to reflect the current housing market.
Quilter’s Griffin points out: “It’s clear that the product is failing to deliver as intended. From our experience with clients, we regularly see confusion over its dual-purpose design, which tries to combine retirement saving with support for first-time homebuyers.
“This lack of clarity undermines its effectiveness, leaving many consumers unsure how best to use it.”
AJ Bell’s Vahey adds: “There is no doubt that the LISA has proved to be a bit of a marmite product. For prospective FTBs, it can offer a massive leg-up onto the property ladder. It is impossible to imagine the government scrapping it altogether.
“The optics of withdrawing support for renters hoping to purchase their first home would eventually mean government replacing it with another scheme, introducing confusion and complexity.
“Nonetheless, the flaws in its design mean the LISA doesn’t work effectively as a retirement savings product. And it has left some savers angry when they face a government-sanctioned punitive exit penalty if their plans change unexpectedly, and they need to take their money out earlier than planned.”
Almost 100,000 people made unauthorised LISA withdrawals in the 2023/24 tax year, according to AJ Bell.
LISAs were introduced in 2016 by former Chancellor George Osborne to provide an alternative method of tax-free saving for retirement, while at the same time encouraging people under 40 to save for a home by offering incentives to get on the property ladder.
