The UK government’s Treasury Committee has today (7 January) launched a call for evidence focused on the Lifetime ISA, which offer an upfront bonus and tax-free access for a first property purchase and from age 60, can be attractive to aspiring homeowners and retirement savers.
In early reaction, Tom Selby, director of public policy at AJ Bell, said: “Lifetime ISAs are an extremely attractive way for people to invest for the future in specific circumstances. For first time buyers in particular a Lifetime ISA is a brilliant way to build up a deposit for a first home and benefit from a sizeable government bonus, as well as enjoying the ability to invest tax free like a conventional ISA.
“Lifetime ISAs can also offer additional flexibility to those saving for retirement, providing another option alongside a pension. For self-employed savers who do not benefit from automatic enrolment, the Lifetime ISA can offer an attractive alternative to traditional pension products.
“However, Lifetime ISAs aren’t perfect and this review from the Treasury Committee is a good opportunity to address some of the issues with their design, as well as exploring where the Lifetime ISA fits in a simplified ISA landscape. AJ Bell has long campaigned for an end to the punitive early withdrawal penalty, instead reverting to the system used during the pandemic when the penalty only matched the original bonus received on the account.
“Likewise, raising the property purchase price limit, which has remained fixed since the Lifetime ISA was introduced, would be an obvious quick win. Analysis from AJ Bell shows that in numerous areas average flats and terraced houses – the sorts of properties that might well appeal to aspiring homeowners – now exceed the £450,000 cap.”
ISA reform
He continued: “Crucially, the Treasury Committee’s findings should be a useful building block that informs the government’s plan to simplify the ISA system.
“Labour’s plan for financial services published in January 2024 pledged to simplify the ISA landscape, making it easier for people to save and invest and boost uptake of Stocks and Shares ISAs.
“Merging Cash and Stocks and Shares ISAs is the obvious starting point, a reform that would make life easier for investors and would-be investors and could provide a significant boost to UK capital markets at the same time. Over the longer term, the government should consider whether the best features of the current ISA regime can be combined into a single ISA product. Precisely where the Lifetime ISA fits within that landscape is up for discussion.
“But the long-term focus must be in simplifying the ISA system, reducing undue complexity and making it easier for people to identify the right product for them, without funnelling people into what feels to many like an either/or choice between cash savings and investments.
“The benefits of simplification for consumers and the UK economy could be substantial. In particular, merging Cash ISAs and Stocks and Shares ISAs – the two most popular ISA products in the UK – would make it easier for those holding money in Cash ISAs to transition towards long-term investing.”
