Lifetime Isa reform is too slow and must be in Budget, say MPs

Ministers have not gone far enough in reforming Lifetime Isas (LISAs) despite being warned these products were not suitable for everyone, Treasury Committee has warned.

Ahead of the November Budget MPs also questioned whether LISAs in their current form were a good use of taxpayer money, as they are forecast to cost the government £3bn over five years.

Anyone aged under 40 can open a LISA to either help save towards retirement or buy a first home. You can put in up to £4,000 a year and the government will top it up by 25%.

In June, the committee found that LISAs were being mis-sold and did not suit everyone, and following a government response to its report MPs said ministers must go further.

“The government has taken some steps towards improving the Lifetime ISA, but I do not believe they have gone far enough. The Lifetime ISA is a confused product that requires reform,” said Dame Meg Hillier, who chairs the committee.

LISAs were launched in 2017 under the then-Conservative government.

Since then, 6% of eligible adults have opened one, with about 1.3 million accounts still open, according to the most recent figures.

In its report, the committee said the LISA’s dual purpose to help people save for both the short-term (for a first home) and long-term (for retirement) “makes it more likely consumers will choose unsuitable investment strategies”.

Research by HM Revenue and Customs, based on a sample of LISA holders, found that 87% of those who had used their LISA to buy their first home said that they could have done so without one.

“Given that the LISA is forecast to cost the government £3bn over the next five years, this raises the question whether the LISA is a good use of taxpayers’ money,” said Dame Meg.

The government, in its response to the report, said that it kept all aspects of LISA policy under review.

The government gave some ground following the committee’s description of the rules which penalise benefit claimants as “nonsensical”.

Currently any savings held in a LISA can affect eligibility for universal credit or housing benefit, whereas this is not the case for other personal or workplace pension schemes.

The committee said that if that was not changed, the LISA should be “clearly labelled as an inferior product” to those who may be eligible for such benefits.

In its response, the government said it would work with industry and across departments to consider ways to “improve the messaging” about the implications of savings and investments on benefit entitlement.