The Treasury Committee has launched a review into whether Lifetime ISAs (LISAs) are still fit for purpose in 2025.
MPs will gather evidence and views from LISA holders, consumer experts and leading opinions in the finance industry to see whether the savings product should be scrapped.
The review – which critics urged former Chancellor Jeremy Hunt to undertake last February – will also look for answers as to whether key parts of LISAs need to be amended for them to continue to be value for money for customers and the government.
The scheme – launched in 2016 – allows savers aged under 40 to bag a 25% bonus from HMRC at the end of every tax year if they save £4,000. This is until they reach 50 years old and is designed to help younger people get onto the property ladder – up to a maximum of £450,000.
If your first home is worth more than £450,000, you will also get back less than you deposited into the account.
However, savers can only withdraw from their pot without a penalty if they are buying their first home. The only other qualifying circumstances are if they are terminally ill with just 12 months to live or if they are aged 60 or over.
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If you withdraw for any other reason, a 25% charge of your contributions will be applied.
This element of the LISA meant over 185,000 savers lost a combined £127m of their own cash to the fines. It is also applied if you withdraw from your LISA within the first year of its opening.
The committee will give experts up until 4 February to provide their opinion on whether the withdrawal penalty should be removed and whether the limit savers can add should increase from its £4,000 limit.
Following the house price cap remaining at £450,000 since the inception of the scheme, MPs will also probe whether the house price should increase with inflation. In London, the average house price exceeds £500,000, whereas for the whole of the UK, it stands at around £267,000.
As well as those factors, the committee will look into whether its current design works “as a combined product for house purchase and pension saving”.
Last year, just 12% of LISA holders went on to buy their first home, while 90% either gave up on the product or did not make any withdrawals.
Popularity of LISAs rising but scheme ‘isn’t perfect’
Brian Byrnes, head of personal finance at Moneybox – the largest provider of LISAs in the UK – welcomed the decision to review the scheme, which, despite some criticism, is growing in popularity.
Byrnes said: “Recent HMRC data shows that more than 1.5 million people are currently saving with a LISA across the country. In the last year alone, Moneybox has seen a 34% increase in customers opening a LISA, which illustrates a growing demand for a product that has been a true lifeline for many thousands of aspiring first-time buyers in recent years as they did all they could to navigate challenging market conditions.
“Most recently available HMRC data shows that, to date, more than 227,600 young people the length and breadth of the country have been supported to buy their first home far sooner than would have otherwise been possible thanks to the Lifetime ISA. Last year, the number of Moneybox Lifetime ISA-enabled house purchases increased by 62% year-on-year.”
Tom Selby, director of public policy at AJ Bell, said: “For self-employed savers who do not benefit from automatic enrolment, the Lifetime ISA can offer an attractive alternative to traditional pension products.”
He added: “However, Lifetime ISAs aren’t perfect and this review from the Treasury Committee is a good opportunity to address some of the issues with their design, as well as exploring where the Lifetime ISA fits in a simplified ISA landscape. AJ Bell has long campaigned for an end to the punitive early withdrawal penalty, instead reverting to the system used during the pandemic when the penalty only matched the original bonus received on the account.”
This article was first published on Mortgage Solutions‘ sister site, YourMoney.com. Read: Treasury Committee launches probe into whether Lifetime ISAs are fit for purpose
