Government issues major update on Lifetime ISAs held by 1.5m Britons
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The Government has given a major update to anyone with a Lifetime ISA (LISA) after announcing plans to abolish them in the Autumn Budget.
The government-backed savings account, held by more than 1.5 million people and introduced in 2017, offers a unique ‘savings rate’ of 25 per cent but can only be used to buy a first home.
Up to £4,000 per year can be deposited with Lisa; the government will add a maximum of £1,000 to this, up to £5,000. Accumulated savings cannot be used to buy a property worth more than £450,000.
Uncertainty about the product has existed since before the November Budget, and this has not completely disappeared as the government confirmed it had begun consultations on a new, simpler product to replace it.
However, a recent update from HMRC has clarified the plans. Most importantly, people who already have a LISA can continue paying into it indefinitely, using it for a first home purchase or for retirement, regardless of any new products coming to market.
Additionally, for those who are considering opening a LISA but haven’t yet, the Treasury says anyone eligible will be able to do so “until the new product becomes available.”
One reason for developing a new product to replace LISA is criticism that savers could be penalized and lose their own money if they violate withdrawal rules. This situation would be corrected in any new option, but questions have been raised by industry experts as to why the government has not removed this penalty from the current LISA structure.
“The government will consult on the introduction of a new, first-time buyer-only product that will provide a bonus when a person uses it to buy a home, remove the need for withdrawal fees and give savers flexibility when their circumstances change,” the HMRC update said.
Moneybox personal finance director Brian Byrnes said up to two million Brits would use LISA when a new product was launched and they would then not be able to benefit from any improvements to the system.
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To better serve them, he said the government should focus on “future-proofing” LISA through reform.
“Savers can take comfort in the fact that HMRC has clarified that people can continue to open Lifetime ISAs until the new product is available, and existing holders can continue to contribute indefinitely.
“This is important not only for the 1.5 million people who already trust the product, but also for anyone planning to open a Lifetime ISA while a new product specifically for first-time buyers is being developed.
“The Lifetime ISA has been hugely successful in helping people save for their first home, but there are small, well-known improvements that could make it work even better for everyone. By the time any replacement product is introduced, around two million people are likely to be using the Lifetime ISA to save for their first home or build up their retirement savings, and a new product would not address these areas for improvement.”
“Rather than creating a completely new product, policy should focus on future-proofing the Lifetime ISA with targeted reforms such as regular review of the property price cap and reducing the withdrawal penalty from 25 per cent to 20 per cent, providing certainty for savers and providers alike.”
In November, Dame Meg Hillier, chair of the Treasury Select Committee, said: “We concluded that the Lifetime ISA is too complex. One of the concerns we raised about its dual purpose of saving for both a home and retirement is that it leads to poor outcomes for savers. “We argued that it would make more sense to create two separate, dedicated policies that would actually help people achieve these goals. […] [having a] A simpler product, especially to help people save money for the household, is a step in the right direction. “We look forward to seeing what the Treasury proposes next year.”
