A government committee has called for the Lifetime ISA (LISA) to undergo reforms and has raised concerns over the 25% withdrawal penalty.
The LISA is a savings scheme for first-time buyers and pension savers which, as well as paying interest, includes a 25% government bonus.
However, concerns over its effectiveness as a long-term savings tool plus outdated restrictions prompted an investigation by the Treasury Select Committee, the results of which have been published today.
Whilst the committee found it ‘may suit those saving for a first home’ it also concluded the LISA may not achieve the best outcome for those using it as a retirement savings product.
Currently, the LISA can be opened by people who are aged between 18 and 40. It can only be used by someone to help them purchase their first home or post-60 as a retirement fund.
Anyone withdrawing the cash for any other reason is penalised to the tune of 25% which, if interest is taken into account, means savers lose more than they originally deposited. This is one of the factors the committee considered needed to be reformed.
The committee noted this charge means that, as well as losing their bonus, LISA holders who need to make an unplanned withdrawal face losing 6.25% of their own savings. As a result, customers are left with less money than they originally deposited.
It quoted recent data which showed a surge in withdrawal charges. In the 2023/2024 financial year, almost double the amount of people made an unauthorised withdrawal (99,650) compared to the number of people who used their LISA to buy a home (56,900). The committee concluded this was ‘a possible indication’ LISAs were not working as intended.
Dame Meg Hillier, chair of the Treasury Select Committee, said: “We are still awaiting further data that may shed some light on who exactly the product is helping.
“What we already know, though, is that the Lifetime ISA needs to be reformed before it can genuinely be described as a market-leading savings product for both prospective homebuyers and those who want to start saving for their retirement at a young age.”
Skipton Building Society is one provider which offers Lifetime ISAs as well as mortgages for first-time buyers. It currently has over 160,000 LISA savers and its data shows nearly 90% of its LISA customers were using their accounts to help make their first home a reality.
Yet its research found by the end of 2027 the LISA house purchase ceiling for £450,000 will fall below the average first-time buyer property price in 10% of the local authorities in Great Britain.
Charlotte Harrison, CEO Home Financing at Skipton Group, said LISAs were a vital tool for many first-time buyers hoping to get onto the property ladder.
But, she added its research provided ‘compelling evidence that the purchase price limit needs to be raised to a minimum of £500,000 to ensure the LISA remains relevant for those it is designed to help.’
“We also called on the government to reduce the unauthorised withdrawal penalty from 25% to 20%,” she said, “ensuring that LISA savers are not losing capital as a result of changing circumstances.
“The government’s review of the ISA landscape is an opportunity to make this important tool as effective as possible.”
