8th Report - Lifetime Individual Savings Account

We endorse the Government’s policy objectives of supporting first-time buyers and encouraging long-term retirement savings. However, the Lifetime ISA may not be the most efficient use of taxpayers’ money to achieve those disparate objectives, which might require separate, tailored policies. (Conclusion, Paragraph 24)

Some Lifetime ISA providers only offer the cash Lifetime ISA. Retirement savings held within cash Lifetime ISAs may not achieve the best outcome for a Lifetime ISA holder over the long term, compared with investing in higher risk but higher return assets such as bonds and equities. (Conclusion, Paragraph 25)

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. (Conclusion, Paragraph 33)

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. (Conclusion, Paragraph 46) Saving for a home with the Lifetime ISA

The house price cap for the Lifetime ISA ensures that Government spending supports those who need financial assistance the most. Any increase in the price cap is an increase in Government spending. 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. (Conclusion, Paragraph 65) 45 Retirement saving with the Lifetime ISA

It is difficult for the Committee, the Treasury and the FCA to determine how the Lifetime ISA is being used for retirement saving across the eligible population without additional data. The Lifetime ISA may not have been in existence for sufficient time to support firm conclusions on its suitability as a retirement savings product. (Conclusion, Paragraph 80)

We recognise the risks for certain individuals opting to save for retirement in a Lifetime ISA instead of a workplace pension, because of lower tax relief for higher- and additional-rate taxpayers and forgoing employer contributions. Although we recognise that it can be a valuable complementary saving product for many, such as the self-employed and all basic rate taxpayers, the Lifetime ISA may not be a suitable retirement saving vehicle for additional rate taxpayers. Given that HMRC’s 2024 to 2025 projections are that of 37.4 million taxpayers, 29.5 million will be paying the basic rate, the Lifetime ISA could provide a very useful and superior third pillar for basic rate and self-employed taxpayers. (Conclusion, Paragraph 81)

The available evidence indicates that saving for retirement with a Lifetime ISA is working well for self-employed people. Any Government reforms to the ISA market must take the interests of the self-employed into account, because self-employed people have historically achieved low levels of retirement saving. (Conclusion, Paragraph 87)

The moment at which people purchase their first property offers a singular opportunity for the Government and/or Lifetime ISA providers to explain the merits of the Lifetime ISA as a retirement savings vehicle. (Recommendation, Paragraph 88) Value for money for the Government

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. (Conclusion, Paragraph 92)

Data concerning Lifetime ISA use by its target market is mixed and inconclusive. We are concerned that Lifetime ISA bonuses may involve significant spending of taxpayers’ money in a way that may not be precisely targeted. Without better quality data on Lifetime ISA holders, it is difficult to estimate the impact of the product across the income distribution. The findings from HMRC’s quantitative research should reveal insights into the demographic and savings profile of Lifetime ISA holders. Without these findings, we are unable to conclude whether the Lifetime ISA is helping its intended recipients. (Conclusion, Paragraph 96) 46

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. (Conclusion, Paragraph 97) Additional criticisms

The Government’s argument that the LISA should be included within a Universal Credit eligibility assessment because the Government has contributed to the balance within the LISA is inconsistent. 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. Treating one retirement product differently from others in that regard is nonsensical. (Conclusion, Paragraph 105)

If the Government wants to encourage long-term saving for retirement through Lifetime ISAs, it must treat the savings in a Lifetime ISA in the same way as other pension savings products as part of the Universal Credit means test. (Recommendation, Paragraph 106)

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. (Recommendation, Paragraph 107) 47