Are calls for Lifetime ISA reform finally being heard? Treasury Committee launches review

Despite its popularity, the Lifetime ISA has received criticism for imposing harsh withdrawal penalties and failing to keep up with the current economic climate.

The Treasury Committee is launching a probe into whether the Lifetime ISA (LISA) remains fit for purpose in 2025, nine years since its inception.

Designed to support prospective first-time buyers in saving a deposit, as well as those putting money away for retirement, the tax-free savings account applies a generous 25% Government bonus to deposits. However, more recently it has come under fire for imposing harsh withdrawal penalties and failing to evolve in line with inflation and house price growth.

These are just some of the issues set to be scrutinised by the Treasury Committee, which earlier this week invited MPs to provide evidence in support of or against the LISA. But, while some stakeholders may be pleased it seems calls for reform are finally being heard, the committee goes as far as to ask if the LISA offers the Government value for money and whether the savings product should be scrapped entirely.

What are the problems with the Lifetime ISA?

One of the main complaints about the LISA is that it hasn’t been adapted to suit the wider economic environment since it first became available in 2017, despite UK house prices increasing significantly over this timeframe.

While more expensive housing demands a larger deposit, the maximum amount you can put away in a LISA each tax-year has never been changed from £4,000.

There’s also the constraint on property value to consider, as money held in a LISA can only be used towards buying a first home worth less than £450,000. Again, this upper limit hasn’t been reviewed in almost a decade despite rising house prices and lobbying from both savers and LISA providers alike.

“There have been plenty of opportunities for the Government to address the obvious downfalls of LISAs, yet there was only ever a temporary tweak to the withdrawal charge to 20% due to the cost of living crisis and the pandemic between March 2020 and April 2021,” recalled Rachel Springall, Finance Expert at Moneyfactscompare.co.uk.

The withdrawal penalty has since returned to 25%, which leaves savers out of pocket if they access their hard-earned cash at any other point aside from to purchase property or in retirement.

“Those savers who therefore become ineligible through no fault of their own will have little option but to pull out their savings, incurring a penalty,” Springall further explained.

Will the Lifetime ISA be scrapped?

Despite its faults, the LISA remains a popular choice for many saving towards their first home.

“Recent HMRC data shows that more than 1.5 million people are currently saving with a LISA across the country,” said Brian Byrnes, Head of Personal Finance at Moneybox. He added the digital provider itself had seen a 34% increase in LISA customers over the past year which “illustrates a growing demand” for the product, with the number of house purchases enabled by its Moneybox Lifetime ISA rising by 62% year-on-year. It’s therefore likely prospective first-time buyers would prefer the LISA to be reformed rather than abolished entirely.

That being said, Springall urged those considering a Lifetime ISA to "check the full terms and conditions before they enter any arrangement to ensure they are eligible for the 25% Government bonus.”

“If savers have any concerns, they may want to consider alternative savings accounts where they can move their money freely, but they will forego the Government boost that LISAs offer,” she concluded.