MPs have warned that those who invest in a Lifetime ISA (LISA) may get back less money than they put into the scheme.
LISAs are a product for first-time homebuyers or those wishing to save for their retirement that allow savers to deposit up to £4,000 per year under an arrangement that the government will top up the figure by an additional 25 per cent. They can be opened by any adult under 40 in the UK, and contributions count towards each person’s overall £20,000 annual ISA allowance.
However, the dual nature of the product has long been a target of criticism, as have the complex criteria for using the funds, which have led to many people losing more than they initially deposit. The £450,000 restriction on the value of the property that can be purchased has not risen with rising house prices, while to complicate matters further, two different versions of the product exist – the cash LISA, and the stocks and shares version, which allows the money in it to be invested.
A Treasury report said that in 2023-24, a total of 99,650 people made unauthorised withdrawals from cash LISAs – in other words, taking their money out for reasons other than to buy a first home or to take a pension – compared with the 56,900 who actually used the funds to purchase a property.
When a saver removes money from their account for any reason other than the stated permitted uses or in the case of terminal illness, a 25 per cent fine is levied on the cash. However, this means an effective penalty of 6.25 per cent on a saver’s own money, not just the return of the government’s contribution.
The government report called this penalty “nonsensical”.
“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,” the report said.
Rachael Griffin, tax and financial planning expert at Quilter, commented after the investment company’s evidence was used to show that Lisas were “fundamentally flawed and not always delivering good outcomes for savers”.
“We’re pleased that the committee acknowledged Quilter’s evidence on [the LISA’s] dual purpose being confusing for savers,” Ms Griffin said. “Savers are often unsure how to use the product, and that uncertainty can lead to poor decisions.
“The withdrawal penalty is also one of the product’s most pressing problems. It removes the government bonus but also reduces the saver’s own contributions. For those facing unexpected costs, or whose house purchase exceeds the price cap, the penalty feels disproportionate and unfair. A simpler system that only recovers the bonus would be far more reasonable.”
Chancellor Rachel Reeves has already intimated that wider ISA reform is on the agenda for later this year, with the cash ISA limit under consideration amid a plan to encourage investing.