When the Lifetime Isa was first announced in 2016, by the then chancellor George Osborne, it was envisaged as a hybrid product that would not only help UK first-time buyers to save a deposit, but also help to boost retirement saving.
But it faced criticism from the outset, on the grounds of unfairness, overcomplicated rules and, increasingly, misalignment with the realities of the property market.
Eight years on from its introduction, MPs are reviewing the Lisa to consider whether it is actually fit for purpose.
If you are aged between 18 and 40, you can open a Lisa and pay up to £4,000 a year into it until you reach the age of 50. The government automatically adds a 25 per cent bonus to each contribution you make. The money grows tax free, and you pay no income or capital gains tax on withdrawals.
While that sounds a very attractive proposition, there are strict rules around how the money can be accessed.
Funds can only be withdrawn as a deposit for a first home costing up to £450,000, or after you reach the age of 60, or if you’re terminally ill and expect to die within 12 months.
Outside of these circumstances you’ll pay a 25 per cent charge on any withdrawals, amounting to the loss of the government bonus, plus a bit of your own money, which amounts to a 6.25 per cent penalty on your own contributions.
In spite of the withdrawal penalties, latest 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. Anecdotal evidence from investment companies points to strong support for Lisas into 2025, amid concerns the government will reform Isa rules.
But there were almost 100,000 penalised withdrawals, with HMRC raking in more than £75mn — almost 40 per cent more than the previous tax year.
This is largely a reflection of the fact that the £450,000 limit has not increased to keep pace with rising property prices. As things stand, first-time buyers whose properties are valued over this threshold cannot use their Lisa account for the deposit, and then have to pay the 25 per cent penalty to get their cash out.
Broker AJ Bell calculates that to remain in line with property prices, which have risen by 28 per cent since the Lisa’s launch in 2017, the threshold should sit at £575,550.
“It’s vital that chancellor Rachel Reeves increases the maximum property value that people can buy using money held in a Lisa,” says Dan Coatsworth an investment analyst with AJ Bell.
As well as increasing the property price limit, reducing the penalty charge from 25 to 20 per cent would also incentivise more savers to benefit from the Lisa, believes Brian Byrnes, head of personal finance at Moneybox, a savings and investment company.
“This would allow savers to access their funds in an emergency without being unduly penalised,” he says.
“Alternatively, introducing a small annual penalty-free allowance for emergencies would provide greater flexibility to savers.”
The consensus is that with some adjustments, Lisas could work well as “first-home accounts”; but there are bigger problems with their dual use for retirement saving — not least because people are confused as to how they measure up as an alternative to traditional pension accounts.
In tax terms, although the 25 per cent Lisa bonus equates to basic rate tax relief on a pension contribution, and there’s the added advantage of tax-free withdrawals from a Lisa, employees are almost always better off with a workplace retirement plan because they benefit from an employer contribution.
For higher and additional rate taxpayers, workplace pensions are a no-brainer because of the additional tax relief they receive on contributions, as well.
The only time when it may make sense for employees to save for the long term into a Lisa is “once they’ve exhausted all potential employer contributions to a workplace pension,” suggests Sir Steve Webb, partner at pension consultant LCP.
For the self-employed paying basic rate tax, however, there are some attractions to utilising these accounts, though the £4,000 annual limit is low for retirement saving.
In spite of withdrawal penalties, Lisas are more flexible and easily accessed than pensions in a financial emergency, which could be another attraction given the inherent uncertainties of self-employed existence; reform of the withdrawal penalty would improve things further in that respect.
However, Webb makes the point that there is a fundamental flaw with the current arrangement for retirement saving: “You cannot take one out after age 40, and you cannot pay in after age 50! What sort of pension product prevents you from paying in just at the point that your earnings are probably at their peak?”
One final drawback is arguably less easily resolved, however. “Because the Lisa is primarily a product to save for a deposit, most people go for a cash Lisa rather than a stocks-and-shares Lisa to give them greater predictability about how much they have,” says Webb.
However, even if you understand the risks attached to saving for the long-term in cash, beyond the age of 40 you’re not allowed to turn a cash Lisa into a stocks-and-shares Lisa. “This means you are stuck [using] low-risk cash deposits for at least 20 years,” he adds.
There are clearly two groups — first-time buyers and the basic-rate self-employed — for whom the Lisa could work well with some basic amendments.
But general confusion, plus the fundamental sticking point that short-term saving needs a different approach from retirement investing, leaves the Treasury Committee with some bigger problems to chew over.
