Treasury Committee slams 'nonsensical' ISA that could affect Universal Credit

Launched in 2017, Lifetime ISAs offer a significant incentive for saversaged 18 to 40 by providing a 25% bonus annually, but they can only use the funds for a first home or retirement, with a 25% charge for other withdrawals. MPs have suggested that the complexity of the account might be leading to poor financial choices, prompting the Treasury Committee to call for reforms or at least a warning for certain savers.

One particular issue highlighted by the report is the potential penalty for benefit recipients since unlike other pension products, Lifetime ISAs are counted when assessing Universal Credit eligibility. This could mean savers who need help at any point in the future might not be eligible for it and also won't be able to access their funds because of the withdrawal criteria.

According to PA, the Committee's report stressed: "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.

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

The report also criticised the withdrawal charge, especially since it does not only reclaim the 25% government bonus but also deducts an additional 6.25% from a person's original savings. "Several witnesses described that loss of 6.25% as a 'withdrawal penalty'," it remarked.

In the financial year 2023/2024, there were 1.3 million open Lifetime ISA accounts with 99,650 unauthorised withdrawals incurring this charge. In stark contrast, a mere 56,900 Lifetime ISA holders managed to utilise their savings for purchasing their first home, and no eligible account holder has reached pensionable age yet.

The committee suggested these figures may demonstrate that Lifetime ISAs fall short of their purpose. They projected that the annual bonuses are set to cost the Treasury around £3 billion over the forthcoming five years.

Additionally, the committee highlighted another hiccup: savers can only use their funds towards a first home purchase if the property costs no more than £450,000, a cap increasingly difficult to meet due to soaring house prices. Nonetheless, the report cautioned that many lose out on their savings due to "lack of understanding", which could unfairly prevent prospective home buyers from stepping onto the property ladder.

Dame Meg Hillier, chairwoman of the Treasury Committee, stated: "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."

She added: "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."

She concluded by saying: "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."