Lifetime ISAs are penalising benefit claimants say MPs
Under the current system, any savings held in a Lisa can affect eligibility for universal credit or housing benefit, despite this not being the case for other personal or workplace pension schemes, the committee said.
The report said: 'The Government provides higher levels of contribution through tax relief to many other pension products that are not included in the universal credit eligibility assessment, such as workplace pensions and Sipps (self-invested personal pensions). Treating one retirement product differently from others in that regard is nonsensical.'
Lifetime ISA win coming in budget?!
Good news! @POLITICOEurope has a scoop by @JamesFitzJourno that Chancellor will follow my suggestion and wipe the 6.25% Lisa withdrawal fine for anyone buying a home. If true, this'd fix the current dire system whereby when people are priced… pic.twitter.com/FtV7bYpH16 — Martin Lewis (@MartinSLewis) February 22, 2024
The report added: 'If the Government is unwilling to equalise the treatment of the Lifetime Isa with other Government-subsidised retirement savings products in universal credit assessments, Lifetime Isa products must include warnings that the Lifetime Isa is an inferior product for anyone who might one day be in receipt of universal credit.
'Such warnings would guard against savers being sold products that are not in their best financial interests, which might well constitute mis-selling.'
The savings accounts enable people to save for their first home or their retirement in one pot.
But the Treasury Committee said the dual-purpose design of the Lifetime Isa, or Lisa, may be diverting people away from more suitable products.
MPs found that the objectives to help people save for both the short and long term make it more likely that people will choose unsuitable investment strategies.
Lisas held in cash may suit those saving for a first home, but may not achieve the best outcome for those using accounts 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 committee said.
If the Government is unwilling to equalise the treatment of the Lifetime Isa with other Government-subsidised retirement savings products in universal credit assessments, Lifetime Isa products must include warnings that the Lifetime Isa is an inferior product for anyone who might one day be in receipt of universal credit
Savers can put in up to £4,000 into a Lisa each year, until they reach 50. They must make their first payment into their Lisa before the age of 40.
The Government will add a 25% bonus to Lisa savings, up to a maximum of £1,000 per year.
People can withdraw money from their Lisa if they are buying their first home, aged 60 or over or terminally ill with less than 12 months to live.
People withdrawing money from a Lisa for any other reason face a 25% withdrawal charge, and can end up with less money than they put in.
The report said: 'The withdrawal charge of 25% is applied to unauthorised withdrawals, causing Lisa holders to lose the Government bonuses that they have received, plus 6.25% of their own contributions.
'Several witnesses described that loss of 6.25% as a 'withdrawal penalty'.'
What is a Lifetime ISA?
A LISA is a savings product for people under 40 and saving for either a first home or retirement.
Damien Jordan, founder of Financial Interest and Damien Talks Money says: "The government adds a 25% bonus to your contributions, which is unmatched by other savings accounts, and you still generate interest on top of this. However, there are penalties if you wish to withdraw the money for any reason other than buying your first home or retirement. You should also be aware that a LISA can only be used on house purchases worth £450,000 or less. This in particular has been an issue for home buyers in the South of England where property prices often exceed this limit."
He adds: "Personally, I would use a Cash LISA to save for a home as I'd want to take advantage of the 25% top up (up to £1,000) from the government, but I wouldn't want to risk a short-term drop in the stock market affecting my ability to buy a home when I planned. For retirement, because the time scales are much longer, I would suggest a Stocks & Shares LISA in order to maximise potential growth."
What's the problem been with Lifetime ISAs?
Many people have lost a portion of their savings due to a lack of understanding of the withdrawal charge or because of unforeseen changes in their circumstances. There are also restrictions on when Lisas can be used to buy a first home, including that the property must cost £450,000 or less.
The report said: 'Many people have lost a portion of their savings due to a lack of understanding of the withdrawal charge or because of unforeseen changes in their circumstances, such as buying a first home at a price greater than the cap.
'However, the case for reducing the charge must be balanced against the impact on Government spending. The Lifetime Isa must include a deterrent to discourage savers from withdrawing funds from long-term saving.'
It also added: 'Before considering any increase in the house price cap, the Government must analyse whether the Lifetime Isa is the most effective way in which to spend taxpayers' money to support first-time buyers.'
The committee noted that in the 2023-24 financial year, nearly double the number of people made an unauthorised withdrawal (99,650) compared to the number of people who used their Lisa to buy a home (56,900).
This should be considered a possible indication that the product is not working as intended, the committee said.
At the end of the tax year 2023–24, around 1.3 million Lisa accounts were open, the report said.
The Office for Budget Responsibility predicts spending on bonuses paid to account holders will cost the Treasury around £3 billion over the five years to 2029-30 – and the committee questioned whether this product is the best use of public money given the current financial strain.
MPs also raised concerns that the product may not be well enough targeted towards those in need of financial support and could be subsidising the cost of a first home for wealthier people.
It said the data on this issue remains unclear.
The report also highlighted the benefits of certain elements of the Lisa, including being an option for the self-employed to save for retirement.
The question is whether the Lifetime Isa is the best way to spend billions of pounds over several years to achieve those goals
Treasury Committee chairwoman Dame Meg Hillier 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.
'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 home buyers and those who want to start saving for their retirement at a young age.'
Recommended reading:
Brian Byrnes, head of personal finance at Lifetime Isa provider Moneybox said: 'Having campaigned for many years on behalf of the UK's largest community of Lifetime ISA savers, we welcome the report today from the Treasury Select Committee as another step towards future-proofing this vital, incentivised saving and investing product."
He added: "Nearly 3 million young savers and investors have already benefited from using a LISA, developing healthy saving and investing habits that stick with them for life and nearly 250,000 first time buyers have used the LISA to purchase their first home. All of this has been achieved for a fraction of the overall government budget.
'The LISA has proven particularly valuable for first time buyers on lower to middle incomes, with 80% of Moneybox LISA savers earning £40k or less. Reducing the unauthorised withdrawal penalty to 20% would be particularly beneficial to this group, especially in light of persistent cost of living pressures. In 2024, emergencies were the leading reason for LISA savers making unauthorised withdrawals (57%) so this change alone could remove a significant barrier to saving and encourage more young people to open and stay invested in a LISA'
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
South Wales Argus
7 minutes ago
- South Wales Argus
Overseas students using higher education as ‘backdoor' to stay in UK
A paper from centre-right think tank Policy Exchange has called for the graduate visa route to be scrapped for all students other than those on postgraduate research degrees. The current model is 'not working' as individuals are using the student visa as a route to longer-term migration, the report has suggested. In May, the Labour Government announced plans to reduce the graduate visa route, which allows overseas students to live and work in the UK for up to two years after their studies, to 18 months. Under changes introduced by the former Conservative government in January 2024, international students in the UK have been banned from bringing dependants with them since – apart from some postgraduate research courses or courses with government-funded scholarships. But the report said the changes do not go 'far enough' and it called for bolder action to ensure study at UK universities is not 'a migration backdoor'. The paper said: 'Most fundamentally, the purpose of student migration should be to study, not to provide a backdoor route to longer term migration or settlement. 'Yet increasingly studying in the UK has become a pathway for widespread and sustained immigration.' The number of international students in the UK increased by 66% between 2014/15 and 2023/24, the report suggested. Two in five (40%) of those who arrived on student visas transferred to a different visa type within one year in 2023 – up from just 3% in 2019, according to the paper. Zachary Marsh, research fellow in education at Policy Exchange and author of the report, said: 'UK universities must return to the business of selling education, not immigration. 'Whilst international students can provide valuable economic benefits, the current system drives migration by those who have no interest in study but instead see the student and graduate visa as an open door to working in the UK. 'The Government and universities must go further to clamp down on those gaming the system. 'A more muscular approach is needed to restore public confidence that international students are good for our universities and wider economy and society.' The report has also suggested that overseas students 'may be crowding out UK students' at some universities. Shadow education minister Neil O'Brien is due to address a Policy Exchange event in London on Wednesday on higher education and migration to coincide with the launch of the think tank's report. Mr O'Brien is expected to say: 'It's not just taxpayers who are losing out. 'The current system isn't working for too many students, who are promised great things but find themselves having to pay back huge sums on very low wages. 'Too many students are being ripped off and we have to ask whether there are better uses of taxpayers' money that will leave young people better off.' Tim Bradshaw, chief executive of the Russell Group, a group of 24 research-intensive universities, said: 'In an increasingly competitive global market, the UK needs to maintain an attractive offer for international students. 'This includes the graduate visa route, which allows international graduates to remain in the UK to work and contribute to the economy for a period after their studies. 'We know that international student recruitment, like any immigration policy, needs to be robust and fair to maintain people's trust in the system. 'Our universities are committed to working with Government to eliminate any abuse of the system and ensure places go to those who are here to study and meet the standards needed to succeed on their course.' A Government spokesperson said: 'A series of measures have already been laid out in the Immigration White Paper to restore control over the system, including reducing the graduate visa from two years to 18 months. 'We will also ensure international graduates move into graduate level roles. This is what the Graduate route was created to facilitate access to, and will also help meet the UK's workforce needs, as part of our Plan for Change. 'We will also crack down further on abuse of our immigration system by strengthening requirements for universities, requiring tighter enforcement on visa approvals, course enrolments and student completions whilst continuing to welcome international students that support our world-leading universities.'
Rhyl Journal
20 minutes ago
- Rhyl Journal
The welfare reform vote: All you need to know
Below, the PA news agency looks at what happened, what it means for personal independence payment (Pip) and universal credit, and what might come next. – What have MPs agreed to? MPs voted on Tuesday to allow the Government's Universal Credit and Personal Independence Payment Bill to advance to the next stage in becoming law. Some 126 Labour backbenchers had previously threatened to vote against the legislation, enough to block its passage through the Commons, but in the end only 49 did so. But ministers were forced to offer a series of concessions to persuade the rebels to back the Government. – What concessions did the Government make? Last week, Work and Pensions Secretary Liz Kendall announced a partial U-turn aimed at heading off the rebellion that included three key points. Firstly, changes to Pip eligibility would only come into effect in November 2026, and anyone claiming the benefit before that date would not be subject to the new rules, instead of imposing the changes on everyone. Secondly, people claiming the health element of universal credit, and new claimants with the most severe conditions, would see their incomes protected in real terms. Thirdly, disabilities minister Sir Stephen Timms would conduct a review of the Pip assessment, 'co-produced' with disabled people. But during Tuesday's debate, Sir Stephen offered a further concession, saying any changes to Pip eligibility would only be introduced after his review had concluded, further delaying them. – What do the concessions mean for the Government's proposals? The decision to push back Pip changes to an unspecified date, and leave uncertain the details of what those changes will be, removes a major part of the Government's reform plans. The proposed changes to universal credit remain, raising the standard allowance while halving the health element for most new claimants from April 2026. But the concessions will also pose a problem for Chancellor Rachel Reeves, who will need to find extra money now the expected savings from welfare reform are no longer expected to materialise. Indeed, the Resolution Foundation think tank suggested the concessions meant there would now be no 'net savings' from the reform by 2029/30, a key year for Ms Reeves' fiscal targets. – What happens next? The Government has pledged to make the necessary amendments to remove the Pip changes from the Bill when it returns to the Commons next week. It is then likely to continue through Parliament, becoming law after it has been approved by both MPs and peers. But wider questions remain for the Government. Not only does Ms Reeves face a fiscal headache, but the Prime Minister could face a political one too as he seeks to repair fractured relations with his backbenchers. And uncertainty will continue to surround the Government's plans for welfare reform. Ministers will still want to reduce the cost of the welfare bill and get more people back into work, while Sir Stephen's Pip review could result in another row depending on what it recommends.
Western Telegraph
21 minutes ago
- Western Telegraph
Overseas students using higher education as ‘backdoor' to stay in UK
A paper from centre-right think tank Policy Exchange has called for the graduate visa route to be scrapped for all students other than those on postgraduate research degrees. The current model is 'not working' as individuals are using the student visa as a route to longer-term migration, the report has suggested. In May, the Labour Government announced plans to reduce the graduate visa route, which allows overseas students to live and work in the UK for up to two years after their studies, to 18 months. Under changes introduced by the former Conservative government in January 2024, international students in the UK have been banned from bringing dependants with them since – apart from some postgraduate research courses or courses with government-funded scholarships. But the report said the changes do not go 'far enough' and it called for bolder action to ensure study at UK universities is not 'a migration backdoor'. The paper said: 'Most fundamentally, the purpose of student migration should be to study, not to provide a backdoor route to longer term migration or settlement. 'Yet increasingly studying in the UK has become a pathway for widespread and sustained immigration.' The number of international students in the UK increased by 66% between 2014/15 and 2023/24, the report suggested. Two in five (40%) of those who arrived on student visas transferred to a different visa type within one year in 2023 – up from just 3% in 2019, according to the paper. Zachary Marsh, research fellow in education at Policy Exchange and author of the report, said: 'UK universities must return to the business of selling education, not immigration. 'Whilst international students can provide valuable economic benefits, the current system drives migration by those who have no interest in study but instead see the student and graduate visa as an open door to working in the UK. 'The Government and universities must go further to clamp down on those gaming the system. 'A more muscular approach is needed to restore public confidence that international students are good for our universities and wider economy and society.' The report has also suggested that overseas students 'may be crowding out UK students' at some universities. Shadow education minister Neil O'Brien is due to address a Policy Exchange event in London on Wednesday on higher education and migration to coincide with the launch of the think tank's report. Mr O'Brien is expected to say: 'It's not just taxpayers who are losing out. 'The current system isn't working for too many students, who are promised great things but find themselves having to pay back huge sums on very low wages. 'Too many students are being ripped off and we have to ask whether there are better uses of taxpayers' money that will leave young people better off.' Tim Bradshaw, chief executive of the Russell Group, a group of 24 research-intensive universities, said: 'In an increasingly competitive global market, the UK needs to maintain an attractive offer for international students. 'This includes the graduate visa route, which allows international graduates to remain in the UK to work and contribute to the economy for a period after their studies. 'We know that international student recruitment, like any immigration policy, needs to be robust and fair to maintain people's trust in the system. 'Our universities are committed to working with Government to eliminate any abuse of the system and ensure places go to those who are here to study and meet the standards needed to succeed on their course.'
