Members of Parliament (MPs) have raised troubling questions regarding the Lifetime Individual Savings Account (ISA). They’re calling for an end to the program’s ineffectiveness on low-income savers and investment choice danger. The Treasury Select Committee’s recent report highlights issues regarding the rules governing Lifetime ISAs, suggesting they may not serve their intended purpose of aiding first-time homebuyers and those seeking retirement savings.
Lifetime ISAs introduced in 2017 by former Chancellor George Osborne. These let people save £4,000 a year until they’re 50. The government boosts these contributions by increasing them with a bonus of up to £1,000 annually. The accounts often have rigid restrictions on withdrawal. Savers can only access their funds without penalty if they are purchasing their first home, aged 60 or over, or terminally ill with less than 12 months to live.
The Treasury Select Committee expressed heavy condemnation on the inaccessibility of withdrawal restrictions. In particular, they drew attention to the fact that homes purchased with Lifetime ISAs cannot cost more than £450,000. This restriction would significantly damage most first-time buyers in costly housing markets. The committee deemed some rules that punish benefit recipients as “nonsensical.” They made the case that Lifetime ISAs could have been mis-sold to people who were eligible for universal credit or housing benefits.
Together with the facts and figures shared that there are 1.3 million Lifetime LISA accounts still in circulation. Millions of savers have not taken full advantage of these accounts. In reality, Lifetime ISAs have flopped – only six percent of eligible adults have opened one since they launched. Furthermore, data from the current fiscal year indicates that nearly twice as many people made unauthorized withdrawals from Lifetime ISAs, incurring penalties, compared to those who used the accounts to purchase a home.
The committee had serious concerns that Lifetime ISAs may not be sufficiently targeted to those who would benefit from the greatest level of support. For example, they highlighted how savings held in a Lifetime ISA can be counted against your universal credit eligibility. Second, it impacts availability of housing benefits in the current, largely dysfunctional system. Though troubling, this scenario has raised critical questions. Are these accounts in fact indirectly enriching wealthier Americans’ home purchases rather than truly aiding those who genuinely need it?
The now-famous consumer champion Martin Lewis weighed in on the issue. He proposed that if you used a Lifetime ISA to buy a property over the lifetime ISA purchase threshold, no financial penalty should apply. Account holders must be returned at least their initial deposit.
“If a Lisa is used to buy a property above the threshold, there should be no fine, they should get back at least what they put in.” – Martin Lewis
Additionally, the committee warned that for those potentially eligible for universal credit, the Lifetime ISA may not be the best savings vehicle. The report stated it includes warnings that the Lifetime ISA is an inferior product for anyone who might one day rely on such benefits.
Currently, savers pay a significant penalty of 25% on any money taken out of a Lifetime ISA for unexpected emergencies. This penalty severely deters people from tapping into their savings at times of genuine need. Most importantly, critics claim cash lifetime ISAs are unlikely to lead to the best outcomes for individuals. That’s particularly true for people who plan to use them primarily as retirement-savings vehicles.