Lifetime ISAs failing savers, should carry ‘consumer warning’ say lawmakers

The Lifetime Individual Savings Account (LISA), which allows people to save towards a deposit for their first home and for retirement, is overly complex and often leaves users worse off than if they had chosen alternative products, an influential group of lawmakers said this morning.

The UK government is currently reviewing the UK ISA product range.  The Treasury Committee’s report recommends that if LISAs survive the current review, the products should carry a warning.

“Such warnings would guard against savers being sold products that are not in their best financial interests, which might well constitute mis-selling,” it said.

Concerns over mis-selling have prevented many household-name financial providers from offering LISAs as part of their ISA range.

Charlie Nunn, chief executive of Lloyds Bank, told an evidence hearing for the inquiry that the group was “concerned” about explaining a complex product with a 25% penalty to its customers.

HSBC UK CEO Ian Stuart agreed. “We always get nervous” explaining such “heavy break clauses” to customers, he said.  

Design problems

The LISA — a hybrid tax-incentivised savings product introduced in April 2017 — was designed to help the under-40s save for a first-home deposit. If the money is not used to purchase a property, it rolls over as a retirement savings pot that can be accessed at age 60. Savers can save up to £4,000 a year which the government then tops by 25% up to £1,000 a year.  

However, the committee inquiry identified issues with the LISA design that it believes make them unsuitable as a vehicle for later life savings for the majority of the UK working population. First, unlike pension savings, savings inside a LISA could affect eligibility for benefits, such as universal credit; second, they do not attract the same tax relief as money saved in a UK-recognised pension scheme.

In addition, under-40s using a LISA to save towards their first home face a punitive 25% penalty if they withdraw the money for another purpose — or even for purchasing a house priced above the £450,000 cap. In 2023-24, almost 100,000 savers incurred these charges for withdrawing money from their LISA.

Public money

The committee further questioned whether LISAs were the best use of public money.

“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,” said committe chair Meg Hillier.

According to HMRC data, only around 6% of UK adults aged between 18 and 40 who are eligible for a LISA have opened one.

HMRC is conducting quantitative research into consumers who have opened LISAs, and the committee said this would be essential to assessing if the product was helping the intended recipients.

“The Treasury must use income distribution impact assessments to 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,” the committee concluded.