Scrap Lifetime Isa bonus because it supports middle classes, MPs urge

Telegraph

6 hours ago

Labour has been urged by MPs to reform the Lifetime Isa because it helps too many middle-class first-time buyers get on to the property ladder.
A Treasury select committee review raised concerns that the tax-free saving product was not helping 'its intended recipients' and that Rachel Reeves, the Chancellor, should 'consider whether it has a future in its present form'.
Lifetime Isas or 'Lisas' were first introduced in April 2017 by former chancellor George Osborne, with the aim of helping first-time buyers and future retirees grow a tax-free nest egg.
Savers aged between 18 and 39 can deposit up to £4,000 a year, with the Government adding a 25pc bonus up to a maximum of £1,000 a year. Around 1.4 million people have the accounts, which can be used to buy a first home up to the value of £450,000 or for retirement.
But the Lisa has faced criticism in recent years because the house price cap has remained frozen since its inception and savers face a 25pc penalty on the total value of their investment if they choose to withdraw it for any other reason.
The Commons committee, chaired by Labour MP Dame Meg Hillier, questioned whether the state bonus was too generous and if it was the best use of public money 'given the current strain on public finances'.
MPs said that the product may not be well-targeted towards those in need of financial support and could in fact be subsidising the cost of a first home for wealthier people at a significant cost to the taxpayer.
Dame Meg said: 'The committee is firmly behind the objectives of the Lifetime Isa, which are to help those who need it onto 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.'
The Office for Budget Responsibility estimated that spending on Lisa bonuses would reach more than £600m in 2027-28 and cost approximately £3bn over the five years to 2029-30.
The report argued that this annual spend was equivalent to the £625m the Government has committed to invest in training construction workers as part of its ambitious plans to build 1.5m new homes in England by the end of the parliament.
Biggest impact
Emma Reynolds, the economic secretary to the Treasury, told the committee: 'Arguably the biggest impact for first-time buyers will be increasing the supply of homes.'
The committee said it feared that Lisas were being used by people who could already afford to buy a home and recommended that the Chancellor set up an impact assessment to assess whether too many middle-class individuals were using the product.
Tom Selby, of AJ Bell, a wealth manager, said: 'Labour came into office with a promise to boost home ownership, predominantly through planning reforms aimed at increasing house building.
'However, pledging to boost home ownership while slashing the incentive scheme for those building a deposit would surely be an ill-advised move likely to frustrate those hoping to get on the housing ladder.'
MPs also argued that the 25pc withdrawal charge, which causes Lisa holders to lose the state bonuses they have received plus 6.25pc of their own contributions, was unfair. Savers also face the penalty if they choose to use the money for anything other than a home or retirement.
Sarah Coles, of Hargreaves Lansdown, a wealth manager, said: 'Since the Lisa was introduced in April 2017, average house prices in the UK have risen by more than 30pc, and the cap hasn't moved. When they started saving, many of those who bust the price cap had no idea prices would rise so far, so they have had to pay the withdrawal penalty through no fault of their own.'
In 2023-24, some 99,650 people paid an exit penalty to take their money out, compared with 56,900 who used the savings to purchase a home. The committee said this indicated the 'product is not working as intended'.
It said the cap, which would be worth £602,000 today if it had risen in life with inflation, ensured government spending supported those who need financial assistance the most.
Claire Exley, of Nutmeg, a digital wealth manager, added that the penalty on the Lisa was 'punitive'.
Mr Exley said: 'The Lifetime Isa withdrawal penalty is excessively punitive. The penalty does not account for a change in life circumstances where an individual may not need the Lisa any more, e.g. inheriting property, or where an individual moves abroad or becomes redundant.
'There should be a mechanism which ensures the Government receives any bonus paid to Lisa savers or investors but that does not excessively harm those who can no longer use a Lisa or whose life circumstances change.'
A Treasury spokesman said: 'Lifetime Isas aim to encourage younger people to develop the habit of saving for the longer term, helping them to purchase their first home or build a nest egg for when they're older. We welcome the committee's report and will now review its findings and respond in due course.'