Research from HMRC published today reveals withdrawals from Lifetime ISAs, other than to buy a first home, were mostly due to unexpected financial changes or lack of awareness of the withdrawal charge, Rachel Vahey has commented below.
Rachel Vahey, head of public policy at AJ Bell, comments:
“Lifetime ISAs can be seen as a mini success story. Overall, government research published today shows those who have taken out and paid into a Lifetime ISA felt it had positively impacted their saving behaviour and that the government bonus had incentivised them to save for their future.
“But that doesn’t mean the product is without its flaws. For those whose strategies unfold according to plan, Lifetime ISAs made it easier and quicker for them to turn their dreams of buying a house into reality. But others, who had to make withdrawals from their Lifetime ISA because of unforeseen changes to their circumstances, felt they had lost out because of the high withdrawal charge.
“Generally, people don’t plan to make ‘unauthorised’ withdrawals, but they end up doing so because life doesn’t always go according to the script. If they could have avoided the charge, often they would, but they haven’t been able to. It’s not right we should penalise these investors because their plans have changed and they haven’t got the financial wriggle room to adapt.
“The Treasury Committee is currently looking at whether Lifetime ISAs deliver for consumers on their purpose, and Emma Reynolds, the Economic Secretary to the Treasury, is due to give evidence tomorrow. She has a real opportunity to highlight that the Lifetime ISA needs revamping and kickstart the government’s wider efforts to simplify the ISA landscape.
“There are some obvious measures that would make the product work more effectively for consumers. These include reducing the withdrawal charge to 20% so it only claims back the government bonus and not 6.25% of the consumer’s own investments, increasing the maximum property purchase price to reflect house price inflation, and removing the age limits to make it more attractive for the self-employed to save for retirement.
“These changes must be considered alongside a broader package of ISA reforms to ensure a joined-up approach to designing the ISA system of the future. A piecemeal strategy has led us to a place where we have too many ISA products, too many rules, and too much complexity. Simplification must be the overarching focus of any government reforms, starting with merging Cash ISAs and Stocks and Shares ISAs into a single tax wrapper.
“By improving the Lifetime ISA and making it more relevant for today’s investors, we can increase its appeal and adaptability and turn it from a mini success story into one that helps many more thousands of people save for their future.”
