5 days ago
Lifetime Isa under scrutiny: MPs question whether too much cash goes to 'well-off' first-time buyers
An influential group of MPs has called for the Government to scrutinise the popular Lifetime Isa, amid claims the accounts disproportionately help well-off savers.
The cross-party Treasury Select Committee said there are concerns that the money spent on Lisa bonuses 'may not be precisely targeted,' and said some benefitting from the scheme would be able to buy a house without this cash.
Lifetime Isas or Lisas can be used by both first-time buyers and as a retirement pot, but the rules surrounding how much someone can pay into the account and when they can withdraw it are
Savers can pay in up to £4,000 per year, and the Government will add a 25 per cent bonus on those contributions, so a maximum of £1,000.
Lisa bonus payments are expected to reach more than £600million in the 2027-28 tax year, according to figures from the OBR. In the five years to 2030, Lisa bonuses are expected to cost the Government £3billion.
The MPs said Lisas may not be the most effective way of using these funds to help first time buyers.
According to His Majesty's Revenue and Customs, half of all bonuses that have been paid on Lisas so far were the maximum bonus of £1,000.
Fund manager Mole Valley Asset Management, which was consulted as part of the report, said the product's 'design mainly benefits relatively well-off individuals rather than acting as a redistributive tool'.
The report also examined the penalty for removing funds from a Lisa account.
Savers can withdraw their funds, along with the bonus, when they purchase a first home which costs £450,000 or less, reach the age of 60 or have a terminal illness.
If savers do choose to withdraw their funds for another reason, they will face a 25 per cent withdrawal penalty, which will knock out the Government bonus as well as eating into the savings the account holder has added to their pot.
The withdrawal penalty would effectively see savers lose 6.25 per cent of their own contributions.
'An increasing number of people are making unauthorised withdrawals and incurring the withdrawal charge, which may indicate that the Lifetime Isa is not working as intended,' the report said.
In the 2023–24 financial year alone, £75 million was paid in withdrawal charges, a 39 per cent increase on the previous year, according to Treasury statistics.
Some 99,650 people made unauthorised withdrawals, while only 56,900 people used their Lisa to buy a home. The average amount taken out was approximately £3,000.
Tom Selby, director of public policy at investment platform AJ Bell, said: 'Even the best-laid plans often go awry and it is unfair to punish people with an exit charge that goes beyond simply recovering the government-funded bonus.
'Reverting to the system used during the pandemic, when the penalty only matched the original bonus received on the account, would be a fairer approach.'
Property price cap examined
Unauthorised withdrawals from Lisas happen for two main reasons: either because the saver needs the money in an emergency, or because they end up buying a house which costs more than £450,000.
Since the Lifetime Isa was launched back in 2017, house prices have risen by some 30 per cent, based on figures from the Land Registry's House Price Index.
The average UK house price as of January this year was £269,000, rising to £564,000 in London.
While house prices have risen, the property price cap for Lisas has been fixed at £450,000, meaning that many who have saved to buy a house using a Lisa have no choice but to buy below the limit, or to remove their funds from their account and pay the penalty.
If the Lisa limit had kept pace with rising house prices, it would now stand around £600,000.
Rachael Griffin, tax and financial planning expert at wealth manager Quilter, said: 'Many who have saved diligently find they cannot use their Lisa for the property they need without facing a financial penalty.
'There are numerous anecdotes of home buyers being constantly outbid by small sums over the threshold as the other interested party knows that by doing so the other buyer loses their ability to use their Lisa, effectively tying their hands.'
But the Treasury Committee said: 'Any increase in the price cap is an increase in Government spending,' and warned that before the cap is raised, it will have to be evaluated whether Lisas are the most effective way of helping first time buyers.
Could the Government scrap Lisas?
The report concluded that the Government should assess whether the Lisa is the best way to support people who need help to get on to the property ladder.
It said the data on who was using Lifetime Isas and their income level was 'mixed and inconclusive' - but that a n ongoing HMRC study would provide information on this.
The report added: 'Given the scale of demand on the public finances, the Government must carefully consider whether significant spending on the Lifetime Isa is the best way of achieving its policy objectives.
'We are concerned that Lifetime Isa bonuses may involve significant spending of taxpayers' money in a way that may not be precisely targeted.'
'The Treasury must [...] assess whether the Lifetime Isa effectively targets people who need financial support.
'If the Lifetime Isa does not achieve that objective, the Treasury should consider whether the Lisa has a future in its present form.'
But personal finance experts urged the Government not to scrap the accounts.
Rajan Lakhani, personal finance expert at Plum, said: 'What's important is acknowledgement that the Lisa product has helped many people to buy a home who may not have been able to without the help that a Lisa product has offered.
'So whilst reform is welcome, removal of the product is not.'
The report also said the dual purpose of Lisas, saving for a first home or a pension, was confusing for users.
The Treasury committee report warned that the product's design could lead to savers making bad investment decisions - for example, saving for retirement in a cash Lifetime Isa, when investing the money would be likely to provide better returns in the long term.
It said that 'The Lifetime Isa may divert people from saving in more efficient pensions.'
Richard Stone, chief executive of the Association of Investment Companies, agreed with this statement, saying: 'The dual purpose of the Lisa could lead consumers to make poor asset allocation decisions.
'It's particularly concerning that consumers may be using cash to save over the long term for retirement rather than accessing the stock market.'
Likewise, some Lisa holders will have a stocks and shares option, but this may not be suitable for those saving up to buy a house over the shorter term.
