Lifetime ISA could hurt low-income savers, say MPs

The Lifetime ISA (LISA) could lead to savers choosing financial products that aren’t right for them, a group of MPs has warned.

People under 40 can open a LISA to either save for a first home or for their retirement.

You can put in up to £4,000 a year until you’re 50 and the government will add a 25% bonus to your savings - up to a maximum of £1,000 a year.

However, the Treasury Committee believes that current rules which penalise benefit claimants are “nonsensical”.

Under the existing system, savings held in a LISA can affect a person’s eligibility for universal credit or housing benefit.

But that’s not the case for other personal or workplace pension schemes.

The Treasury Committee has said that if this isn’t changed, the LISA should be “clearly labelled as an inferior product” to those who may be eligible for these benefits.

25% withdrawal charge leaving people with less money

The committee also raised concerns with the 25% charge for withdrawing funds due to unforeseen circumstances. 

This means that as well as losing their bonus, people with a LISA who have to make an unplanned withdrawal will lose 6.25% of their savings.

As a result, they’ll be left with less money than they originally put in.

Figures from the 2023-24 financial year show that nearly 100,000 people made an unauthorised withdrawal.

That’s almost double the number of people who used their LISA to buy a property.

The Treasury Committee said this shows that “the product is not working as intended”.

How many people have a LISA?

Since LISAs launched in 2017, 6% of eligible adults have opened one.

However, the committee said there is no information on how people on different income brackets are using the product.

This, it stated, means it’s unclear whether government money is actually going to the people who need it most or if it’s helping wealthier people buy homes.

The Treasury Committee predicts the government will spend around £3bn on bonuses over the next five years, which it said might not be “the best use of public money” right now.

LISAs need reforming, says committee chair

Committee chair Dame Meg Hillier insisted that it is “firmly behind the objectives of the Lifetime ISA”.

However, she said it “needs to be reformed before it can genuinely be described as a market-leading savings product”.

“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,” Dame Meg added.