- HMRC has released new research gathered from both Lifetime ISA account holders as well as those who are eligible but have not taken out a Lifetime ISA
- Lifetime ISA customers took out an account either to buy a house (46%) or to save for retirement (47%). Only a minority (7%) had both objectives
- 11% of account holders made unauthorised withdrawals and were subject to a 25% penalty. Among these, 86% were aware that the charge would be applied
- Ending the withdrawal charge is the change most likely to encourage more people to open a Lifetime ISA
- At the Spring Statement, the government committed to looking at options for ISA reform
- The Treasury Committee recently published a report on Lifetime ISAs criticising their complexity, and highlighting that reforms to the early withdrawal charge and maximum property purchase price could boost their appeal
- AJ Bell has long campaigned for ISA simplification, arguing that combining cash and stocks and shares ISAs in a single tax wrapper could reduce complexity and encourage savers to invest
Rachel Vahey, head of public policy at AJ Bell, comments:
“Lifetime ISA account holders have given the tax wrapper a resounding thumbs up, showing the product can help younger generations realise their home ownership dreams. Almost all (96%) found it easy to set up a Lifetime ISA and make withdrawals (87%). And almost 80% said the government bonus had been either essential or important when buying their first home.
“But despite this, the research, following hot on the heels of a critical Treasury Committee report, shows there are several design flaws that need to be improved to ensure Lifetime ISAs can spread much wider and help more people to save for a first home or retirement.
“AJ Bell has long campaigned for reducing the punitive Lifetime ISA early withdrawal penalty. Most who withdrew funds early knew about the risks but still went ahead with the withdrawal despite the charge. This could have been for many reasons, but the research shows those who made unauthorised withdrawals were more likely to be struggling financially.
“Even the best-laid plans often go awry and it is unfair to punish people with an exit charge that goes beyond simply recovering the government-funded bonus. Reverting to the system used during the pandemic, when the penalty only matched the original bonus received on the account, would be a fairer approach.
“The government currently has ISAs on the examination table, taking a good hard look at how ISAs help people invest and save for their future. Hopefully, it will also consider how it can help more young people benefit from a Lifetime ISA.
“The Lifetime ISA is subject to a range of age-related constraints on both contributions and withdrawals – government bonuses on contributions only apply up to age 50 and you cannot make a withdrawal until age 60, unless using the savings to buy a first home. But the research clearly shows that half the people who took out a lifetime ISA wanted to use it to save for retirement.
“Many people choose to supercharge their savings plans in the middle and latter stages of their career and Lifetime ISAs are an especially convenient retirement saving option for self-employed workers in particular. Removing the age limit which restricts new accounts only to those age 18-39 would help more people take advantage of the scheme.”
The case for ISA simplification
“At the Spring Statement, and again at the Mansion House speech, government confirmed that it will review the current ISA system, promising to simplify ISAs while encouraging wider use of Stocks and Shares accounts.
“ISAs are incredibly popular but political tinkering means a patchwork quilt of products has been stitched together over time – the fact we have the Lifetime ISA at the same time as still having Help to Buy ISAs in circulation, illustrates how complex the landscape has become.
“Research supported by AJ Bell shows that when faced with excess complexity, people often choose the path of least resistance in the form of cash saving. As the Treasury Committee report points out, the binary nature of cash and stocks and shares Lifetime ISAs exacerbate the danger people end up saving in cash when they could be better served investing, especially when using the account to fund retirement.
“Removing complexity could play a crucial role in smashing the psychological and material barriers between saving and investing. Simplifying the ISA landscape, including the Lifetime ISA, would make it easier for people to identify the right product for their needs and put an end to what many consumers see as an either/or choice between cash savings and investments.”