With changes to Individual Savings Accounts (ISAs) expected in the Autumn Budget, one existing variant has been heavily criticised by the Treasury Select Committee.
Background of the Lifetime ISA (LISA)
The Lifetime ISA (LISA) made its debut in George Osborne’s final Budget in March 2016. At the time, it appeared to be a proposal for a new form of pension savings product and the potential precursor to a radical overhaul of the pension tax regime. After Osborne was replaced by Philip Hammond in the wake of the Brexit vote, it was doubtful whether the LISA would come into existence. Nevertheless, it was eventually launched in April 2017.
Why has the lisa struggled
Many ISA providers decided to give LISA the cold shoulder. The product was seen as too complex and difficult to advise on. Eight years on from its launch, only one in seven ISA providers also offer LISAs. It was probably LISA’s mediocre success that caught the attention of the Treasury Select Committee at the start of this year.
key issues highlighted by the treasury select comittee
At the end of June, the Committee issued its report, which highlighted several problems with LISAs, including:
• The early withdrawal charge
This is levied at 25% of the amount withdrawn, clawing back more than the bonus given on each contribution. In 2023/24, HMRC collected £75 million of early withdrawal charges, a level which the Committee thought “may indicate that the Lifetime ISA is not working as intended”.
• Dual purpose structure
LISA withdrawals can be made charge-free from age 60, or if the funds are used towards the purchase of a first home, valued at up to £450,000. These two goals – one long term, the other short term – would normally require different strategies of investment, but some LISAs are only available as cash plans, with no stocks and shares component.
• Cost to the Exchequer
Although the maximum annual LISA subscription is only £4,000, the total cost to the government of the 25% subscription bonus is projected to be about £3 billion over the five years to 2029/30. At a time when the Chancellor is scrabbling for every penny, the Committee questioned whether LISAs were good value or an unnecessary handout.
The future of the LISA – what investors should consider
The Committee’s report could sound the death knell for new LISAs, so if you want to invest in one, act soon – but only after taking advice, as there may be better options.
DISCLAIMER
The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.
Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.
