The Lifetime ISA was introduced in 2016 and allows first-time buyers and those saving for retirement to benefit from a tax-free savings account that the Government then tops up with a bonus of 25%, up to a limit of £1,000 per tax year.
A review of the Lifetime ISA was launched earlier this year as the initiative, with one of the main criticisms being the punitive withdrawal penalty of 25% if you want to use the money for anything other than buying a first home under £450,000, you’re over 60 or you’re terminally ill with fewer than 12 months to live.
The house price cap has also come under scrutiny, with some noting that it is limiting.
Speaking at a Treasury Committee hearing, Emma Reynolds, Economic Secretary to the Treasury, said the Lifetime ISA withdrawal penalty cannot be abandoned due to the nature of the product.
She explained that the Lifetime ISA is a “voluntary savings product” and “people go into it with their eyes wide open”.
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“They [the customers] and the providers should make sure that they [customers] understand the terms and conditions, and having some rules around a penalty if you withdraw is in line with, for example, rules around if you were to make an unauthorised withdrawal of your pension.
“In fact, the penalty for withdrawing your pension early is much heftier than the 25% in this case. We can’t have a risk-free option of: you invest for the long term, but if you take it out, there isn’t a charge. We wouldn’t have that situation, so there has to be some sort of penalty or withdrawal charge in a product like this.”
Reynolds added that there were “mixed views” in the HMRC qualitative study from users, with some describing it as “unfair” and others saying it was a “good deterrent” so they didn’t take money out.
“Any changes that could be made to perhaps improve that situation would cost money, and you have to get the money from somewhere else,” she said.
Reynolds added: “I think there is some confusion about the withdrawal penalty, because it’s a 25% bonus, but when you withdraw, you don’t just lose the bonus, you lose 25% of the whole.
“I can see how that could be confusing to people, but… it’s the providers’ responsibility to make that clear.”
Regarding the house price cap, she said that for the Lifetime ISA, it is “relatively high”, pointing to the £200,000 difference between the Lifetime ISA house cap and the one for Help to Buy.
She also noted that recent figures suggested that the average first-time buyer house price was £240,000.
“If we were to increase the price cap, then we would have to find money from elsewhere, and then the question would be: is that value for money?” Reynolds said.
She added that the Government had not “actively considered” regional variations.
ISA reform will be looked at ‘in the round’
Reynolds added that the Government was looking at ISA reform “in the round” and was interested to hear the recommendations from the committee along with upcoming research from HMRC, but would not be drawn into making policy announcements in front of the committee.
Prior to the Spring Statement, reports suggested that the Government was looking at cash ISA reform that would lower the maximum saving limit per year to £4,000, a fall from £20,000, or scrapping them completely.
Reports have suggested that cash ISA reform is a long-term goal and will not be taken off the table completely, with some suggestions saying that it should be included in the Autumn Statement.
The reported move came under criticism, with research suggesting that it would impact a fifth of savers’ ability to get on the property ladder and lenders saying it could make mortgages more expensive as it is used as a source of funding.
Reynolds said the Government was “very interested in boosting the culture of retail investment [but] anything we do will be very carefully considered”.
This article was first published on YourMoney.com‘s sister site, Mortgage Solutions. Read: ISA reform on cards but Lifetime ISA withdrawal penalty and house price cap unlikely to change, Economic Secretary says
