Some people who pay into a Lifetime Individual Savings Account (LISA) may end up getting less money out than they put in, MPs have warned, as they call for the product to be reformed. Anyone under 40 can open a LISA to either help save towards retirement or buy a first home. You can put in up to £4,000 a year and the government will top it up by 25%. But the Treasury Committee said if LISA funds were withdrawn early due to unforeseen circumstances, charges mean people face losing 6.25% of their own savings. It also warned the "complex" product may not suit everyone, and it might have been mis-sold to people on certain benefits. The government has said previously it is looking at reforming ISAs. You can hold a LISA in addition to any other type of individual savings account, such as a cash ISA or a stocks and shares ISA. These other options allow you to pay in up to £20,000 a year. LISAs were launched in 2017 under the then-Conservative government. Since then, 6% of eligible adults have opened one, with about 1.3 million accounts still open, according to the most recent figures. MPs on the Treasury Committee have been gathering evidence on whether the product is still fit for purpose. In a new report, the committee said the LISA's dual purpose to help people save for both the short- and long-term "makes it more likely consumers will choose unsuitable investment strategies". "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. It noted a surge in withdrawal charges, with almost double the amount of people making an unauthorised withdrawal (99,650) compared to the number of people who used their LISA to buy a home (56,900) in 2023-24. The committee said this should be considered a possible indication that the product was not working as intended. It also described the rules which penalise benefit claimants as "nonsensical". Currently any savings held in a LISA can affect eligibility for universal credit or housing benefit, whereas this is not the case for other personal or workplace pension schemes. If that is not changed, the committee said the LISA should be "clearly labelled as an inferior product" to those who may be eligible for such benefits. The Office for Budget Responsibility predicts spending on bonuses paid on LISAs will cost the Treasury around £3bn over the next five years. The committee questioned whether the LISA was "the best use of public money given the current strain on public finances" and also raised concerns that the product could be "subsidising the cost of a first home for wealthier people at a significant cost to the taxpayer". "We are still awaiting further data that may shed some light on who exactly the product is helping," said committee chair Dame Meg Hillier. "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." The BBC has contacted the Treasury for a response to the report. The government has previously said it is "looking at options for reforms" when it comes to ISAs to encourage investing money. It has said that while it is important to support people to save, it wants to get the balance right.
Lifetime ISAs leave some with less money than they put in
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"MPs Call for Reform of Lifetime ISAs Amid Concerns Over Financial Returns"
Bbc News
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TruthLens AI Summary
The Lifetime Individual Savings Account (LISA) has come under scrutiny by Members of Parliament (MPs) who have raised concerns that some individuals may end up withdrawing less money than they initially deposited. Designed to assist those under 40 in saving for retirement or purchasing their first home, the LISA allows contributions of up to £4,000 per year, with a government bonus of 25%. However, the Treasury Committee highlighted significant drawbacks associated with early withdrawals, which can incur a penalty of 6.25% on the funds. This penalty, coupled with the LISA's complexity, has led to calls for reform, particularly regarding its suitability for certain demographics, such as those receiving specific benefits. The committee noted that the product might have been mis-sold to individuals who would not benefit from its features, raising the question of whether it truly serves its intended purpose of encouraging savings among young people.
The Treasury Committee's report also pointed to a troubling trend in withdrawal patterns, with nearly double the number of unauthorized withdrawals compared to those utilizing the LISA for home purchases in the 2023-24 period. This discrepancy suggests that many users may not be fully aware of the implications of their choices, prompting the committee to label the product as potentially inappropriate for certain users, particularly benefit claimants. The report criticized the current rules that penalize those on benefits, suggesting that the LISA should be distinctly marked as an inferior option for individuals in such situations. With an estimated £3 billion in bonuses expected to be paid over the next five years, the committee questioned whether the LISA is the most effective use of public funds, especially as it may disproportionately benefit wealthier individuals. Chair Dame Meg Hillier emphasized the need for substantial reforms to ensure that the LISA can genuinely support both first-time homebuyers and young savers effectively. The government has acknowledged the necessity for potential reforms to ISAs and is considering options to better balance support for savings with fiscal responsibility.
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