A committee of MPs has put the Lifetime ISA (LISA) under the microscope, gathering evidence to see if they’re the right solution for savers and investors.
The report highlighted room for improvement, but also revealed just how valuable it is for groups of people who need all the help they can get.
But it’s not stopped rumours swirling on what could be next for LISAs and whether they’ll be improved or just scrapped altogether.
This article isn’t personal advice. Remember, investments rise and fall in value, so you could get back less than you invest. ISA and tax rules can also change, and any benefits depend on individual circumstances. If you’re not sure what’s right for you, speak to us about financial advice.
What is the Lifetime ISA and what are the benefits?
The key benefit of the LISA is the government bonus.
If you’re aged 18-39, you can open a LISA and pay in up to £4,000 a year as part of your overall £20,000 ISA allowance. The government will top up your contributions by 25% – up to £1,000 a year.
It has two key purposes.
You can use your LISA money to buy your first home – worth up to £450,000. There are some rules around this worth checking – notably that you must hold the account for at least a year before you can buy. If not you’ll pay a 25% penalty on the money you take out (more on this below).
You can also withdraw the money once you’re 60 and use it for tax-free retirement income. You can’t open a new LISA once you’re over 40, but if you’ve opened one by then, you can continue paying into it up to the age of 50.
What is the LISA penalty?
If you withdraw money for any other reason you’ll pay a penalty of 25%.
This doesn’t just remove the government bonus, it adds a 6.25% penalty on your own money too.
The committee found that over £200mn has been paid so far in withdrawal penalties.
In fact, in 2023/24 more people paid these penalties than the number who used their LISA to buy a home.
The flexibility to withdraw money from a LISA in an emergency is a key benefit, which helps persuade some reluctant people to put money aside for the long term.
However, the penalty means giving up a chunk of your own money, which is clearly unfair – penalising people for trying to do the right thing.
It’s why we want to see the penalty reduced to 20%, which effectively just removes the government bonus.
The value of using a LISA to buy a home
The LISA has helped 228,000 people onto the housing ladder.
Given the mountain they have to climb, it’s a brilliant head start.
However, the LISA isn’t perfect.
HL is among many groups calling for the house price cap on the LISA to be reconsidered.
Since the LISA was introduced in April 2017, average house prices in the UK have risen by more than 20%, and the cap hasn’t moved.
When they started saving, many of those who bust the price cap had no idea prices would rise so far, so they’ve had to pay the withdrawal penalty through no fault of their own.
Get a 25% government bonus with this year’s £4,000 Lifetime ISA allowance.
Make your money work harder. You can choose to save cash or invest in the stock market, and as with other ISAs, your money can grow free from UK tax.
Pick investments for the best potential returns. Choose from funds, shares, ready-made options and more.
Get started in minutes. Open or top up from £100 lump sum, or £25 a month.
The benefit of using a LISA for retirement savings – particularly for self-employed
The sweet spot of the LISA can rest in its ability to boost retirement savings among the self-employed.
This is a group that has long under saved into pensions.
The most recent findings of the HL Savings and Resilience Barometer found that only 21% of self-employed households are on track for a ‘moderate’ retirement. This compares to 36% of households overall.
Self-employed people can be hesitant to save into a pension because of their variable income and the fact they can’t access their money until at least the age of 55 (rising to 57 in 2028).
This is compounded by the fact that they don’t get an employer contribution.
The 25% bonus on a LISA acts in the same ways as basic-rate tax relief on a pension and the money can be accessed if needed, subject to a penalty. Added to this, you can take any income tax free.
We have long argued that if the penalty could be reduced from 25% to 20%, this could act as a further incentive for the self-employed to get a LISA.
We also believe that removing the age 40 limit on opening a LISA would open the product up even further given the fact that many people don’t become self-employed until later in life.
Enabling people to open a LISA and benefit from the bonus up until the age of 55 could be a gamechanger in boosting the retirement prospects of this under-served group.
Please bear in mind that saving into a Lifetime ISA (LISA) instead of a pension means that you could miss out on employer contributions, and your entitlement to certain means-tested state benefits could be affected.