The Treasury Committee has criticised the government for failing to set out plans to reform the Lifetime ISA, following its report highlighting complexity and calling for changes to withdrawal charges and property limits. HMRC research shows scrapping the withdrawal penalty would drive uptake, while AJ Bell continues to push for ISA simplification.
Rachel Vahey, head of public policy at AJ Bell, comments:
“The Treasury Committee is clearly frustrated that the government has put the Committee’s Lifetime ISA recommendations on the back burner, choosing instead to progress on ISA reform at its own rate.
“Rather than a ‘wait and see’ response, the Treasury Committee wanted to see action and a plan for reform put in place. But the government has thwarted those wishes.
“HMRC’s recent research showed that Lifetime ISA customers gave the tax wrapper a resounding thumbs up, helping many realise their housing dreams.
“But the product is not without its flaws. AJ Bell has long campaigned for reducing the punitive early withdrawal penalty. Even the best-laid plans often go awry and it is unfair to punish people with an exit charge that goes beyond simply recovering the government-funded bonus. Reverting to the system used during the pandemic, when the penalty only matched the original bonus received on the account, would be a fairer approach.
“The government currently has ISAs on the examination table, taking a good hard look at how ISAs help people invest and save for their future. Hopefully it will also prioritise looking at how it can help more young people benefit from a Lifetime ISA.”
The case for ISA simplification
“At the Spring Statement, and again at the Mansion House speech, government confirmed that it will review the current ISA system, promising to simplify ISAs while encouraging wider use of Stocks and Shares accounts.
“ISAs are incredibly popular but political tinkering means a patchwork quilt of products has been stitched together over time – the fact we have the Lifetime ISA at the same time as still having Help to Buy ISAs in circulation, illustrates how complex the landscape has become.
“Research supported by AJ Bell shows that when faced with excess complexity, people often choose the path of least resistance in the form of cash saving. As the Treasury Committee report points out, the binary nature of Cash and Stocks and Shares Lifetime ISAs exacerbate the danger people end up saving in cash when they could be better served investing, especially when using the account to fund retirement.
“Removing complexity could play a crucial role in smashing the psychological and material barriers between saving and investing. Simplifying the ISA landscape, including the Lifetime ISA, would make it easier for people to identify the right product for their needs and put an end to what many consumers see as an either/or choice between cash savings and investments.”
