Treasury Committee probes whether Lifetime Isa is still fit for purpose in 2025

The Treasury Committee is seeking views on whether the Lifetime Isa is still fit for purpose in 2025.

Lifetime Isas (Lisas) help people save for their first home – if the property costs £450,000 or less – or their retirement.

Withdrawing cash for any other reason, unless someone is terminally ill, can trigger a penalty.

Savers face a charge of 25% for making an unauthorised withdrawal.

The account was introduced in 2016, but there have been calls to overhaul its design.

The £450,000 property purchase cap for first-time buyers has attracted criticism, with house prices having surged in recent years.

Data obtained last year from HM Revenue & Customs (HMRC) and published by money app Plum showed that in the tax year 2022-23 the average of the top 25 penalties paid for unauthorised withdrawals was £11,000.

People under the age of 40 can open a Lisa to contribute up to £4,000 each year until they are 50. The state adds a 25% bonus to Lisa savings, up to a maximum of £1,000 per year.

The Treasury Committee is aiming to gather views from the finance industry, consumers and experts.

MPs want to hear views on questions such as whether the current design of the Lisa is fit for purpose, including as a combined product for house purchase and pension saving.

They also want to know whether, given its policy purposes, the Lisa represents value for money for the Government and whether the withdrawal penalty should be removed.

Other questions MPs are seeking views on is whether the Lisa should be scrapped altogether, or whether it should be restricted to those with no access to a workplace pension.

The committee is also asking whether the Lisa house price cap should be raised in line with inflation, or removed.

The deadline for submitting evidence is February 4.

Tom Selby, director of public policy at AJ Bell, said that while Lisas can be an “extremely attractive” way to invest in specific circumstances, “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”.

He added: “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.”

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Allowing people to open and contribute to a Lisa up until the age of 55 would open this product up to even more people.”

She added: “The 25% Government top-up on savings of up to £4,000 per year is a huge incentive to help people save but the corresponding 25% exit penalty not only takes away this bonus but also a chunk of your hard-earned savings.

“This not only acts as a disincentive for those saving for their first home but also those who want to use it to save for their retirement.”