LISA Savings Plans Face Scrutiny Over Dual Purpose, Penalties

A government-backed savings product designed to aid both short-term and long-term goals is now under review. This initiative, launched in 2017, is facing criticism for its potential drawbacks, particularly regarding its suitability for retirement savings and the penalties it imposes on benefit claimants.

The Committee’s Findings

The Treasury Committee is currently evaluating the Lifetime Individual Savings Account (LISA). Launched under the previous Conservative government, around 6% of eligible adults have opened one. Recent figures show approximately 1.3 million accounts are still active.

A new report released by the committee highlights concerns. It states the dual purpose of the LISA, designed for both short- and long-term savings, can lead people to choose unsuitable investment strategies.

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The report also pointed out a rise in withdrawal charges. The number of people making unauthorized withdrawals nearly doubled, reaching 99,650, compared to 56,900 who used their LISA to buy a home in 2023-24. This could suggest the product isn’t functioning as intended.

“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

The report also criticized the current rules that penalize benefit claimants. This includes people whose savings in a LISA can influence their eligibility for universal credit or housing benefit. Experts believe this could affect around 100,000 people. In the first quarter of 2024, almost 20,000 people faced benefit reductions due to their savings (Gov.uk).

Rules and Regulations

The committee called the regulations “nonsensical.” Current rules mean savings held in a LISA can impact eligibility for universal credit or housing benefit. This is unlike other personal or workplace pension schemes. The committee suggested that if changes are not implemented, the LISA should be “clearly labelled as an inferior product” for benefit claimants.