What’s the future for the lifetime ISA?

The lifetime ISA never gave the impression of a thoroughly thought through idea.

Introduced in 2017, it felt like it had risen from the ashes of a doomed government attempt to restructure pensions tax relief, offering a new perspective on giving upfront bonuses on payments through ISAs rather than pensions.

However, just because it had a shaky start does not mean lifetime ISAs should be confined to the dustbin. Instead, they can be a fantastic savings and investment product when used correctly, and hundreds of thousands of people have used them to help buy their first home or kickstart their retirement fund.

But it’s not perfect; it has some flaws.

The Treasury Committee has recently been taking a closer look at lifetime ISAs, and it published its report at the end of last month, unearthing some of those design challenges.

First is the withdrawal charge, applied when money is taken from the lifetime ISA for reasons other than first house purchase (within the rules) or after age 60. AJ Bell has long campaigned to reduce this charge from 25% to 20% so it only claws back the bonus paid and not an additional 6.25% of the investor’s own money. This seems fair. After all, life happens, and even though some start paying into a lifetime ISA with no intention of taking the money out other than for the prescribed purposes, plans often change.

An increasing number of people are making unauthorised withdrawals. In 2023-24, £75 million was paid in withdrawal charges, a 39% increase on the previous year. While the majority of the almost 100,000 people who paid the charge paid less than £1,000, it does point to either people not understanding the charge or simply needing the money.

It seems especially penal to apply the 6.25% charge if people are taking out funds to help them buy their first house, but the purchase price is now over the maximum £450,000 allowed. That limit was set eight years ago and is long overdue an uplift. If lifetime ISAs are there to help people buy houses, then that should apply wherever you live in the country, including the Southeast.

The Committee also agreed with our findings that the lifetime ISA provides a good way to help the self-employed save. These are the people that automatic enrolment forgot, and they deserve help to save for retirement.

The Treasury Committee concluded that the Government needs to review lifetime ISAs, to establish if the Government’s funds are being spent in the right way on bonuses.

I think sweeping them into the current wider Treasury review of ISAs would be a sensible move.

With a complicated withdrawal charge, frozen limits, and a split between cash and investment that doesn’t easily lend itself to tying together two objectives with different horizons, lifetime ISAs only add to the already fragmented and complex ISA regime.

ISAs are a very popular product that help millions of people achieve their financial dreams. We need to preserve that. But we also need to make it easier for people to understand their choices, to pick the right solution for them, and to move seamlessly from saving to investment when the time is right.