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Lifetime Individual Savings Accounts raise the risk of people making poor financial decisions, according to a report by an influential committee of UK MPs who questioned whether the tax-free savings product is subsidising wealthier first-home buyers at taxpayers’ expense.
The House of Commons Treasury select committee called into question the “dual purpose” of Lifetime Isas, saying it makes the product “complex and increases the risk of consumers choosing unsuitable investment strategies”.
The report, released on Monday, comes as the government considers sweeping reforms for the market as part of a broader plan to encourage more people to invest in equities and bonds.
Dame Meg Hillier, chair of the Treasury committee, said it supports the aims of the Lifetime Isa to help first-time home buyers as well as those saving for retirement early on but questioned whether it “is the best way to spend billions of pounds over several years” to achieve those objectives.
“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,” Hillier said in a statement on Monday.
George Osborne introduced the Lifetime Individual Savings Account, or Lisa, as chancellor in 2016. It allows people aged 18 to 40 to start saving up to £4,000 each tax year with a 25 per cent bonus from the government until they reach the age of 50.
It can be withdrawn tax-free to buy a first time home worth less than £450,000, when turning 60 years of age or if the saver is terminally ill.
Data from HM Revenue & Customs shows Lisas are popular with aspiring homebuyers: 56,900 people used one to purchase their first property in 2023-24.
Almost 1.4mn Lisa accounts were open on April 2024. But they have been criticised by some industry experts for being unfair, overcomplicated and not being adjusted in line with rising house prices.
The product has remained relatively unchanged in the eight years since its introduction but only one in seven of all Isa providers have chosen to offer it to consumers. Charlie Nunn, chief executive of Lloyds Banking Group, put the bank’s reluctance to provide it largely down to its complexity.
“We are very concerned about it from a complexity and conduct perspective,” he told the Treasury committee. “Secondly, if you want to save for retirement, there are other better options.”
The report describes saving to buy a home and for retirement as “contrasting goals” and states that investing for different durations can increase risk for consumers because those investing for the long-term, such as retirees, are more likely to benefit from higher risk and return investments like equities.
“This raises a concern that people may not be optimising their retirement savings, which could leave them with a smaller pot in the future,” it said.
The report was also critical of the 25 per cent charge imposed on so-called unauthorised withdrawals, which means savers lose the government bonus as well as 6.25 per cent of their own money, and its inclusion when determining eligibility for universal credit.
There were almost 100,000 penalised withdrawals in the 2023-24 tax year, costing savers more than £75mn.
The MPs wrote that it is “nonsensical” to treat one pension product differently from others and recommended that the government should either equalise it or tell people that a Lifetime Isa is an “inferior product” for anyone that might claim universal credit.
“Such warnings would guard against savers being sold products that are not in their best financial interests, which might well constitute mis-selling,” they wrote.
