Martin Lewis speaks out after ISA report and says some 'unfairly penalised' in savings

Martin Lewis has spoken out after a damning report said a key ISA product was ‘confusing’ and ‘needs more warnings’. The personal finance expert spoke out after a committee of MPs said the dual-purpose design of the Lifetime Isa, or Lisa, may be diverting people away from more suitable products - and making them chose unsuitable investment strategies.

Lifetime ISA (LISA) is a type of savings account designed to help individuals aged 18-39 buy their first home or save for retirement. It offers a 25% bonus from the government on savings up to £4,000 per year, until the account holder turns 50. Withdrawals for a first home purchase (up to £450,000) or from age 60 are tax-free. Other withdrawals are subject to a 25% government charge.

Mr Lewis has been a long-time critic saying that the £450,000 LISA house price limit has remained frozen since it launched in 2017, despite house prices rising significantly since then. This has left some first-time buyers unable to find a suitable property under the limit, and savers buying a home that no longer qualifies are then effectively charged a 6.25% penalty to withdraw funds.

Speaking this morning after the report was released the founder of MoneySavingExpert.com said: “Lifetime ISAs have worked well for many, but there is a growing hole that needs urgently addressing. No first-time buyer should be penalised for accessing their LISA savings to buy their first property – as that’s what the state, and the marketing, encourages them to do.”

“Yet that’s what happens when young people, priced out by inflation, try to use their LISA savings for a home above the £450,000 threshold (which hasn’t moved since LISAs launched in 2017) – as is getting more common in the SE of England. It’s understandable that they don’t get the 25% bonus, but they are effectively fined 6.25% of their money (so £625 per £10,000 saved) to withdraw it. This is unfair, unjust and the rules need changing. If a LISA is used to buy a property above the threshold, there’s should be no fine, they should get back at least what they put in.”

“And this flaw doesn’t just hurt those with LISAs. It puts off many young people, especially from lower-income backgrounds, who tend to be more risk-averse, from opening LISAs in the first place.”

“This is something we’ve banged the drum about for years. So, I’m glad it appears in the Treasury Committee report. It’s a small fix, with very little cost to the state, that would enable and encourage many young people to feel confident about LISAs – and so it’s critical it’s addressed in the government’s imminently expected ISA review.”

The Treasury Committee said the dual-purpose design of the Lifetime Isa, or Lisa, may be diverting people away from more suitable products. MPs found that the objectives to help people save for both the short and long term make it more likely that people will choose unsuitable investment strategies.

Lisas held in cash may suit those saving for a first home, but may not achieve the best outcome for those using accounts as a retirement savings product, as they are unable to invest in higher-risk but potentially higher-return products such as bonds and equities, the committee said.

It also described current rules penalising benefit claimants as “nonsensical”. Under the current system, any savings held in a Lisa can affect eligibility for universal credit or housing benefit, despite this not being the case for other personal or workplace pension schemes, the committee said.

The report said: “The Government provides higher levels of contribution through tax relief to many other pension products that are not included in the universal credit eligibility assessment, such as workplace pensions and Sipps (self-invested personal pensions). Treating one retirement product differently from others in that regard is nonsensical.”

The report added: “If the Government is unwilling to equalise the treatment of the Lifetime Isa with other Government-subsidised retirement savings products in universal credit assessments, Lifetime Isa products must include warnings that the Lifetime Isa is an inferior product for anyone who might one day be in receipt of universal credit.

“Such warnings would guard against savers being sold products that are not in their best financial interests, which might well constitute mis-selling.” Savers can put in up to £4,000 into a Lisa each year, until they reach 50. They must make their first payment into their Lisa before the age of 40.

The Government will add a 25% bonus to Lisa savings, up to a maximum of £1,000 per year. People can withdraw money from their Lisa if they are buying their first home, aged 60 or over or terminally ill with less than 12 months to live.

People withdrawing money from a Lisa for any other reason face a 25% withdrawal charge, and can end up with less money than they put in. The report said: “The withdrawal charge of 25% is applied to unauthorised withdrawals, causing Lisa holders to lose the Government bonuses that they have received, plus 6.25% of their own contributions.

“Several witnesses described that loss of 6.25% as a ‘withdrawal penalty’.”

There are also restrictions on when Lisas can be used to buy a first home, including that the property must cost £450,000 or less.

The report said: “Many people have lost a portion of their savings due to a lack of understanding of the withdrawal charge or because of unforeseen changes in their circumstances, such as buying a first home at a price greater than the cap. However, the case for reducing the charge must be balanced against the impact on Government spending. The Lifetime Isa must include a deterrent to discourage savers from withdrawing funds from long-term saving.”

It also added: “Before considering any increase in the house price cap, the Government must analyse whether the Lifetime Isa is the most effective way in which to spend taxpayers’ money to support first-time buyers.”

The committee noted that in the 2023-24 financial year, nearly double the number of people made an unauthorised withdrawal (99,650) compared to the number of people who used their Lisa to buy a home (56,900).

This should be considered a possible indication that the product is not working as intended, the committee said.

At the end of the tax year 2023–24, around 1.3 million Lisa accounts were open, the report said.

Treasury Committee chairwoman Dame Meg Hillier said: “The committee is firmly behind the objectives of the Lifetime Isa, which are to help those who need it onto the property ladder and to help people save for retirement from an early age. The question is whether the Lifetime Isa is the best way to spend billions of pounds over several years to achieve those goals.

“We know that the Government is looking at Isa reform imminently, which means this is the perfect time to assess if this is the best way to help the people who need it.”