LIFETIME ISA – VIEWS OF THE TREASURY SELECT COMMITTEE

In the March 2025 Adviser Update, we highlighted the use cases for the Lifetime ISA (LISA) and that a Treasury Select Committee (TSC) was requesting evidence as to whether it remains an appropriate financial product.

Whilst the LISA has been a success as a savings vehicle for first time buyers, which has been the primary use case since its inception, we believe it requires some adjustments to better meet saver’s needs, including:

• Revaluing the current cap on the property purchase price of £450,000 to take account of increases to property values since 2017.
• Reducing the early withdrawal charge from 25% to 20% so that just the government bonus is reclaimed without an effective 6.25% penalty.

On 30 June the TSC published their report into the LISA, a copy of which can be found here. They have received views from a wide range of sources, with some very different perspectives. In their report the TSC expressed concerns over the costs to the government of the LISA bonus, and whether the cost is an effective way for the government to meet their policy objectives.

Cap on property purchase price

Concerning the cap on property purchase prices, whilst many respondents advocated for an increase to the cap, the report is not in favour of this without further analysis into the costs to the taxpayer. They take the view that the product was designed to support those at the lower end of the market and highlight the fact that the existing cap is still higher than the average first time property purchase price for all regions in the UK except London. If this gets reflected into government policy, it suggests that any increase to the cap is unlikely in the short term and anyone thinking about using a LISA to save for a property purchase in the more expensive parts of the UK should bear this in mind.

Early withdrawal charge

In relation to the early withdrawal charge, whilst most organisations responding to the call for evidence were clearly in favour of a reduction to 20%, the TSC believe that it is important to retain a deterrent to discourage savers from taking early withdrawals from long-term savings. Again, the potential costs of the reduction were a concern. Firstly, a reduction to the early withdrawal charge might lead to an increase in applications from individuals who are not planning to use the LISA for its intended purposes, which then leads to an increase in the costs of providing the government bonus. In addition, in evidence submitted by the Treasury, any costs arising from reducing the withdrawal charge would have to be funded by reduced expenditure elsewhere.

LISA as a long-term savings plan

The evidence received by the TSC about the LISA as a retirement savings vehicle was mixed and the TSC’s main conclusion is that more time and evidence is needed to assess its suitability. They recognise the potentially superior benefits of a LISA for basic rate taxpayers who want to use it as a supplement to workplace pension provision, and also as a long-term savings vehicle for the self-employed.

Does the LISA meet the government’s policy objectives?

As for answering the question of whether the LISA remains an appropriate financial product, the TSC do not appear convinced. Firstly, the question whether the costs of the LISA bonus represent value for money, pointing out that the estimated costs of LISA bonuses are expected to be in the region of £600m for 2027/28. However, looking at this in isolation of other options open to savers is likely to be misleading. For example, if subscriptions were not paid into a LISA some savers might have used them to fund pensions that come with potentially higher tax relief than a LISA. Secondly, and perhaps more fundamentally, the TSC query whether the dual nature of the LISA is appropriate given the ‘disparate objectives’ of supporting first time buyers whilst trying to encourage longer term savings.

Attention will now turn to Rachel Reeves’ Mansion House speech on 15 July. The press is awash with speculation about potential changes to the cash ISA subscription limit, and there is growing anticipation of a broader review of the ISA landscape – one in which the TSC’s recent findings are likely to play a significant role.

All information is based on our understanding and interpretation of applicable law and regulation.

 

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