LifetimeIsascould lead to savers making poor investment decisions and may not be the best use of public money, a cross-party committee of MPs has said.
In a report published on Monday, the Treasury select committee described rules which penalise benefit claimants as “nonsensical” and concluded thatlifetime Isas, known as Lisas, may have been mis-sold to savers eligible for universal credit or housing benefit.
Lisas, launched by the then Conservative chancellor, George Osborne, in 2017,allow people to save towards their first homeor for their retirement. Deposits are topped up by the government, up to a maximum £1,000 a year.
However, the Treasury committee said that the dual-purpose design of the Lisa may be steering people away from more suitable savings products.
Dame Meg Hillier, who chairs the Treasury committee, said: “The committee is firmly behind the objectives of the lifetime Isa, which are to help those who need it on to the property ladder and to help people save for retirement from an early age. The question is whether the lifetime Isa is the best way to spend billions of pounds over several years to achieve those goals.
“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.”
Cash Lisas could suit those saving for a first home but may not achieve the best outcome for those using them 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.
Raising another issue, the committee said that any savings held in a Lisa can affect eligibility for universal credit or housing benefit under the current system, even though this does not apply to other personal or workplace pension schemes.
The committee said if this was not changed, the accounts should “include warnings that the lifetime Isa is an inferior product for anyone who might one day be in receipt of universal credit”.
Another issue raised by the committee is the 25% charge for withdrawing funds because of unforeseen circumstances.
The committee noted that in 2023-24, almost twice as many people made an unauthorised withdrawal from the products (99,650), incurring the withdrawal penalty, as used them to buy a home (56,900). This should be considered a possible indication that the product is not working as intended, the MPs warned.
Savers can put up to £4,000 into a Lisa each year, until they reach 50, and must make their first payment before the age of 40. They can withdraw money without a charge if they are buying their first home, are aged 60 or over, or are terminally ill with less than 12 months to live.
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Since they were introduced eight years ago, 6% of eligible adults have opened a Lisa, and about 1.3m accounts are still open. The Office for Budget Responsibility predicts spending on bonuses paid to account holders will cost the Treasury about £3bn over the five years to 2029-30.
The committee questioned whether this product was the best use of public money given the strain on the public finances. It also raised concerns that the product may not be well targeted towards those in need of financial support and could be subsidising the cost of a first home for wealthier people.
There are restrictions on when Lisas can be used to buy a first home, including that the property must cost £450,000 or less.
The consumer champion Martin Lewishas long campaignedfor a revamp of the scheme, including a reduction in the withdrawal charge to 20% and upping the £450,000 house price cap. He welcomed the findings, saying: “If a Lisa is used to buy a property above the threshold, there should be no fine, they should get back at least what they put in.”