- Committee will consider raising contribution limit past £4,000
A group of MPs has launched a review into the popular Lifetime Isa, to assess whether the savings account is still ‘fit for purpose’.
The Treasury Committee will ask questions including whether the £4,000 annual contribution limit should be raised, whether the penalty for withdrawing money in certain circumstances should be removed, or whether the accounts should be abolished altogether.
Savers under the age of 40 can open a Lifetime Isa (Lisa) and until they hit 50, the Government will chip in £1 for every £4 they save, giving a £1,000 bonus on the maximum £4,000 a year you can save.
That money can either be used towards a deposit on a first home or be withdrawn from the age of 60 to help fund retirement.
But if savers withdraw their cash for any other reason (other than being terminally ill, for which an exception is granted) it comes with a 25 per cent charge.
This can end up costing someone more than they put in. For example, if someone paid in £1,000 and received the £250 Government bonus, they would have accumulated £1,250, assuming no investment growth.
Savings boost: People under 40 can open a Lisa, and to contribute up to £4,000 each year until they’re 50. At the end of each tax year, this is topped up by a 25% bonus from
But if they then withdrew the money without using it for a suitable home deposit the 25 per cent penalty would apply to the £1,250, leaving them with £937.50 – and £62.50 out of pocket.
The MPs will also seek to establish whether the £450,000 price cap on homes purchased using money from a Lisa should be increased with inflation, or removed.
Since the Lisa was introduced the average house price has risen by 40 per cent, according to the latest Land Registry figures.
The £4,000 a year cash limit that savers can put into their Lisa is also considered by some as too restrictive given higher house prices.
The committee will also consider whether this cap should be raised.
It is aiming to gather views from the finance industry, consumers and experts.
Former Chancellor George Osborne introduced the Lisa in the 2016 Budget, aiming to provide an alternative method of tax-free saving for retirement while also encouraging people to save for a property.
Reforms to the early withdrawal charge and maximum property purchase price could boost the Lisa’s appeal, according to Tom Selby, director of public policy at AJ Bell.
‘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,’ he said.
‘Likewise, raising the property purchase price limit, which has remained fixed since the Lifetime Isa was introduced, would be an obvious quick win.
‘Our analysis 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.’
Warning: The thing to watch out for on the Lifetime Isa is that money that doesn’t qualify as a deposit for a first home is heavily penalised if withdrawn before the age of 60
