With the news of HMRC’s qualitative research into understanding the LISA, Shaun Moore, tax and financial planning expert at Quilter comments:
HMRC’s newly published ‘Understanding the Use of the Lifetime ISA’ report lays bare the confusion at the heart of one of the government’s flagship savings products. Most striking is the revelation that even financially literate savers, including those actively contributing to their LISA, did not realise that the 25% penalty on non-qualifying withdrawals can leave them with less than they originally invested. People simply do not realise it’s not just a clawback of the government bonus – it’s a loss on their own money.
“Once participants in the research understood this, there was broad consensus that the current rules feel unfair. Many supported a reduction of the withdrawal charge to 20%, which would at least allow savers to break even if circumstances forced them to dip into their pot. This sentiment was particularly strong among lower-income ‘Irregular’ and ‘Cushioned Savers’, who felt they were being penalised for financial instability rather than poor planning.
“The report also highlights a deeper behavioural issue. While the penalty does deter early withdrawals, sometimes positively so, it does so in a way that is poorly understood and often emotionally charged. Savers reported feelings of resentment and frustration at the idea of being charged to access what they saw as their own money, particularly when providers are profiting from holding those funds.
“From a policy perspective, the Lifetime ISA is trying to be too many things at once. It is a hybrid house deposit account and retirement vehicle wrapped up in ISA branding. People are much more likely to understand the product if it has one clear purpose: to get on the housing ladder. To improve transparency and engagement, we believe the government should simplify the product and rebrand it as a ‘First Home Account’. This would reflect how it’s used in practice and help rebuild trust among the very savers it was designed to support.
“A product that penalises people more than they expect, in ways they don’t understand, risks doing more harm than good. The LISA has real potential, but only if it’s made clearer, fairer, and fit for purpose.”
