The Treasury Select Committee said it supported the government’s policy objectives for the LISA of “supporting first-time buyers and encouraging long-term retirement savings”.
However, it said the LISA “may not be the most efficient use of taxpayers’ money to achieve those disparate objectives” and it “might require separate, tailored policies”.
The report added that some providers only offered cash LISAs, and retirement savings held in this product “may not achieve the best outcome” compared to “higher-risk but higher-return assets such as bonds and equities”.
The Treasury Select Committee also said a growing number of people were making unauthorised withdrawals and incurring the withdrawal charge, which stands at 25%, which could show the product is “not working as intended”.
HM Treasury figures estimated that it had collected around £213m in withdrawal charges from 286,000 individuals over the six tax years to 2023-24.
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“Many people have lost a portion of their savings due to a lack of understanding of the withdrawal charge or because of unforeseen changes in their circumstances, such as buying a first home at a price greater than the cap.
“However, the case for reducing the charge must be balanced against the impact on government spending. The Lifetime ISA must include a deterrent to discourage savers from withdrawing funds from long-term saving,” it said.
Property price cap will not be changed until LISA is evaluated
The Treasury Select Committee said that since 2018-19, 228,000 people have used LISAs to buy 182,500 homes, equal to an average of 38,000 homes bought each year.
The report stated that the average withdrawal to buy a home comes to around £15,000, with the average first-time buyer deposit coming to around £55,000.
It suggested that buyers “typically save additional funds beyond their Lifetime ISA contribution”.
The South East was also the most popular region for people using the product to buy a home, representing around 16% of all purchases in the tax year 2023-24.
The report also examined the property price cap, which is set at around £450,000 and has not changed since 2017. If it is surpassed, then a 25% withdrawal charge is imposed.
It has long been criticised by the industry as house prices have continued to rise, meaning more may be hit by a hefty withdrawal charge.
“The house price cap for the Lifetime ISA ensures that government spending supports those who need financial assistance the most. Any increase in the price cap is an increase in government spending.
“Before considering any increase in the house price cap, the government must analyse whether the Lifetime ISA is the most effective way in which to spend taxpayers’ money to support first-time buyers,” the report said.
Lifetime ISA ‘needs to be reformed’ before it can be called ‘market-leading’
The report concluded that the government must “carefully consider whether significant spending on the Lifetime ISA is the best way of achieving its policy objectives”.
“Data concerning Lifetime ISA use by its target market is mixed and inconclusive. We are concerned that Lifetime ISA bonuses may involve significant spending of taxpayers’ money in a way that may not be precisely targeted.
“Without better quality data on Lifetime ISA holders, it is difficult to estimate the impact of the product across the income distribution. The findings from HMRC’s quantitative research should reveal insights into the demographic and savings profile of Lifetime ISA holders. Without these findings, we are unable to conclude whether the Lifetime ISA is helping its intended recipients,” it said.
The report urged the Treasury to use income distribution impact assessments to evaluate whether the product “effectively targets people who need financial support”, and if it does not do that, then the Treasury needs to look at whether the LISA has a “future in its present form”.
Dame Meg Hillier, chair of the Treasury Select Committee, said: “The Committee is firmly behind the objectives of the Lifetime ISA, which are to help those who need it onto the property ladder and to help people save for retirement from an early age. The question is whether the Lifetime ISA is the best way to spend billions of pounds over several years to achieve those goals.
“We know that the government is looking at ISA reform imminently, which means this is the perfect time to assess if this is the best way to help the people who need it.
“We are still awaiting further data that may shed some light on who exactly the product is helping. What we already know, though, is that the Lifetime ISA needs to be reformed before it can genuinely be described as a market-leading savings product for both prospective homebuyers and those who want to start saving for their retirement at a young age.”
