- Treasury Committee report on Lifetime ISA criticises complexity
- Lifetime ISAs can be attractive to aspiring homeowners and retirement savers…
- …but reforms to the early withdrawal charge and maximum property purchase price could boost their appeal
- Reform of Lifetime ISA should form part of a broad-reaching government approach to simplifying ISAs
- AJ Bell has long campaigned for ISA reform aimed at simplifying the system to help consumers
Tom Selby, director of public policy at AJ Bell, comments:
“The Lifetime ISA is a fantastic savings and investment product when used correctly, but there’s no question that there are several design flaws which need to be ironed out. The Treasury Committee report provides further impetus behind the government’s plans to reform the ISA market, with the aim of ensuring the UK’s labyrinthine ISA system works better for consumers and boosting long-term investing in the process.
“AJ Bell has long campaigned for an end to the punitive early withdrawal penalty on Lifetime ISAs. 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.
“Likewise, raising the property purchase price limit, which has remained fixed since the Lifetime ISA was introduced, would be an obvious way to help first-time buyers, who in some parts of the country face a decision between buying a cheaper home outside the area they really want to live in, or saving without the help of a Lifetime ISA. Analysis from AJ Bell shows that in numerous areas average flats and terraced houses – the sorts of properties that might well appeal to aspiring homeowners – now exceed the £450,000 cap.
“The Lifetime ISA is something of a hybrid between a pension and an ISA, with some 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. There’s some logic behind that approach, but preventing people from opening an account once they reach age 40 seems an unnecessary restriction.
“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 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 exacerbates 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.”
