Lifetime ISAs leave some with less money than they put in

Some people who pay into a Lifetime Individual Savings Account (LISA) may end up getting less money out than they put in, MPs have warned, as they call for the product to be reformed.

Anyone under 40 can open a LISA to either help save towards retirement or buy a first home. You can put in up to £4,000 a year and the government will top it up by 25%.

But the Treasury Committee said if LISA funds were withdrawn early due to unforeseen circumstances, charges mean people face losing 6.25% of their own savings. It also warned the "complex" product may not suit everyone and it might have been mis-sold to people on certain benefits.

The government said it would respond to the committee in due course.

You can hold cash or stocks and shares in a LISA or a combination of both.

A LISA can be held in addition to any other type of individual savings account, such as a cash ISA or a stocks and shares ISA. These other options allow you to pay in up to £20,000 a year.

LISAs were launched in 2017 under the then-Conservative government.

Since then, 6% of eligible adults have opened one, with about 1.3 million accounts still open, according to the most recent figures.

MPs on the Treasury Committee have been gathering evidence on whether the product is still fit for purpose.

In a new report, the committee said the LISA's dual purpose to help people save for both the short- and long-term "makes it more likely consumers will choose unsuitable investment strategies".

"Cash LISAs may suit those saving for a first home but may not achieve the best outcome for those using it 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 report said.

• 'We used a Lifetime ISA to buy our first home'

It noted a surge in withdrawal charges, with almost double the number of people making an unauthorised withdrawal (99,650) compared to those who used their LISA to buy a home (56,900) in 2023-24.

The committee said this should be considered a possible indication that the product was not working as intended.

First-time buyers can use a LISA to purchase a home up to the value of £450,000, and there have been calls by some to raise this threshold as it has not changed since 2017, while house prices have risen.

Some of the unauthorised withdrawal charges may have been for people who used the money to buy a home worth more than £450,000.

The committee also described the rules which penalise benefit claimants as "nonsensical".

Currently any savings held in a LISA can affect eligibility for universal credit or housing benefit, whereas this is not the case for other personal or workplace pension schemes.

If that is not changed, the committee said the LISA should be "clearly labelled as an inferior product" to those who may be eligible for such benefits.

Senthil Kumar Kabali, 37, from St Neots, Cambridgeshire, invested the maximum £8,000 in a Lifetime ISA over a period spanning two tax years. He received £2,000 from the government.

One of the conditions of the product is an investor must buy a property at least 12 months after the first LISA payment.

However, Mr Kabali bought a £257,000 flat in November 2024, having cashed in his LISA in September, when he had only had it for six months, because he had found an "ideal" property within his budget and did not want to lose it.

"Instead of waiting for my LISA to mature, I took out the money and ended up losing over £500 along with the government bonus," he said.

"In my opinion, it's a fraudulent scheme taking money from individuals."

The Office for Budget Responsibility predicts spending on bonuses paid on LISAs will cost the Treasury around £3bn over the next five years.

The committee questioned whether the LISA was "the best use of public money given the current strain on public finances" and also raised concerns that the product could be "subsidising the cost of a first home for wealthier people at a significant cost to the taxpayer".

"We are still awaiting further data that may shed some light on who exactly the product is helping," said committee chair Dame Meg Hillier.

"What we already know, though, is that the Lifetime ISA needs to be reformed before it can genuinely be described as a market-leading savings product for both prospective homebuyers and those who want to start saving for their retirement at a young age."

A Treasury spokesperson said: "Lifetime ISAs aim to encourage younger people to develop the habit of saving for the longer term, helping them to purchase their first home or build a nest egg for when they're older.

"We welcome the committee's report and will now review its findings and respond in due course."

The government has previously said it is "looking at options for reforms" when it comes to ISAs to encourage investing money.

It has said that while it is important to support people to save, it wants to get the balance right.

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