The House of Commons Treasury Committee has been pondering the future of Lifetime ISAs (LISAs).
The Lifetime ISA (LISA) is arguably a good example of brand overstretch. When ISAs were first launched in 1999, there were only two varieties, and they replaced two existing tax-favoured savings plans – PEPs (personal equity plans) and TESSAs (tax exempt special savings accounts). As ISAs grew in popularity, Chancellors could not resist expanding their remit. In 2011, the Junior ISA was introduced, followed in 2015 by the Help to Buy ISA and in 2016, the Innovative Finance ISA. Finally, in 2017, LISA came on the scene.
LISAs have survived and grown in popularity but still account for less than 4% of total ISA subscriptions, based on the latest (2022/23) HMRC data. That relative lack of success has prompted the House of Commons Treasury Committee to open an inquiry, “into whether the Lifetime Individual Savings Account is still an appropriate financial product nine years after it was created”.
LISA RULES
The Committee has been taking evidence from experts in the savings field, including the think tank member credited with designing the LISA and the ubiquitous Martin Lewis. As a reminder, the broad rules for LISAs are:
• They can only be started by somebody aged 18–39 and no subscriptions can be paid beyond 50.
• The maximum subscription is £4,000 per tax year (which counts towards the overall ISA maximum of £20,000).
• The government provides a 25% uplift to the contribution, e.g., a £4,000 subscription becomes a £5,000 investment.
• The funds in a LISA can only be used without penalty:
o To provide for the purchase of a first home with a maximum value of £450,000 (unchanged since 2017); and/or
o If drawn from age 60 onwards.
If benefits are otherwise withdrawn, a 25% penalty applies, e.g., a £5,000 fund delivers a net £3,750 to the LISA owner.
LISA WITHDRAWAL CHARGE
Among the points made by the experts, one that drew common criticism was that the 25% withdrawal charge does more than claw back the government uplift. During the pandemic, the charge was temporarily reduced to 20% (effectively matching the uplift) and there was a consensus that the post-Covid reversion to 25% was an error.
There was less agreement on the suitability of LISAs as replacements for other forms of retirement planning, a reminder that if you are considering a LISA then advice should always be taken.
DISCLAIMER
Tax treatment varies according to individual circumstances and is subject to change.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
The Financial Conduct Authority does not regulate tax advice.
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.
