Lifetime ISA alert as savers risk losing money - Rachel Reeves warned 'confused product needs reform'

The Lifetime ISA has come under fire again, with parliamentary critics accusing ministers of ignoring repeated warnings about its flaws. Critics say there is still no clear plan to reform the scheme, despite concerns that it does not properly support those who need financial help the most.

There are also fears that its dual-purpose design - covering both home buying and retirement saving - could steer people away from better options and even put some of their money at risk.

While officials have promised to work with providers to improve how the product is explained, no details have yet been given on what this will involve.

A Lifetime ISA, or Lisa, is open to anyone under 40 saving for their first home or retirement. Savers can pay in up to £4,000 a year and get a 25 per cent bonus from the state, worth up to £1,000 annually.

Savers can keep paying into a Lifetime ISA until the age of 50. After that, the account stays open and continues to grow through interest or investment returns.

Money can be taken out without penalty if it is used to buy a first home worth up to £450,000, once the saver turns 60, or in cases of terminal illness with less than a year to live. Any other withdrawal triggers a 25 per cent charge, which can leave people with less than they originally paid in.

New data shows just how costly these penalties can be. Figures obtained by GB News through a Freedom of Information request reveal that the most severe cases saw average charges of £10,600 on withdrawals of £42,300.

Almost 1,000 people were hit with penalties of exactly £1,000 for early withdrawals, while 130 faced charges of £2,000. More than 1,300 savers lost £5,000 or more to the withdrawal penalty.

Dame Meg Hillier, chair of the Treasury Committee, said: "The Government has taken some steps towards improving the Lifetime Isa, but I do not believe they have gone far enough. The Lifetime Isa is a confused product that requires reform."

She highlighted concerning data: "Recently published research by HMRC based on a sample of Lisa holders found that 87 per cent of those who had used their Lisa to buy their first home said that they could have done so without their Lisa."

The committee chair added: "Given that the Lisa is forecast to cost the Government £3billion over the next five years, this raises the question of whether the Lisa is a good use of taxpayers' money."

She urged ministers to reconsider the scheme's structure: "The Government has an opportunity at the Budget to think again on the Lisa for would-be first-time buyers and those saving for retirement alike."

Ministers defended the programme, stating they remain "committed to making Isas, including Lifetime Isas, as simple and flexible as possible."

Official figures show there were 1.3 million active Lifetime ISA accounts in 2023/24, with 227,600 people having used the scheme to buy their first home since it was introduced in 2017.

The Treasury Committee has called for Lifetime ISA savings to be treated in the same way as pension contributions when Universal Credit is assessed.

Without such reforms, it argued, the product should be labelled as inferior and carry clear warnings about the potential disadvantages for anyone who may need to claim benefits in the future.

Ministers have indicated they are open to adding clearer warnings to the Lifetime ISA, but the committee said this fell short of a firm commitment to address the underlying problems.

Concerns were also raised that the product’s dual purpose - for both home buying and retirement saving - could push people away from more suitable options and risk part of their savings.

Although the government has promised to work with providers to improve how the product is explained, the committee said there was still no detail on how this would be delivered in practice.

Ministers maintained that withdrawal penalties ensure the scheme serves its core purposes of facilitating homeownership and retirement savings.