Article

A recent warning from the UK’s Treasury Select Committee has sparked debate over the Lifetime Individual Savings Account (LISA), with MPs claiming that the product could leave investors with less money than they initially invested. Despite the headline-grabbing 25% government bonus, the structure of the LISA may be misleading savers—particularly younger and less financially experienced individuals—into choices that ultimately harm their long-term financial position.

What Is a Lifetime ISA?

Introduced in 2017, the Lifetime ISA is available to anyone aged 18–39. Savers can contribute up to £4,000 per year, and the government adds a 25% bonus—up to £1,000 annually. The funds can only be withdrawn without penalty for:

• Purchasing a first home (up to £450,000),
• After turning 60, or
• If diagnosed with a terminal illness.

Withdrawals made outside of these conditions are hit with a 25% penalty, which not only removes the government bonus but also slices into the saver’s original capital.

What Are MPs Concerned About?

1. Harsh Penalty Structure

The 25% penalty on unauthorised withdrawals effectively recoups the bonus and charges an additional 6.25% on original savings. Many savers mistakenly assume the penalty merely reclaims the bonus, but in reality, it leaves them with less than they deposited. This affects those who need to access their money early for emergencies or changing life circumstances.

According to the Treasury Committee report, nearly 100,000 savers were penalised in 2023–24 alone—almost double the number who successfully used a LISA to buy a home.

2. Outdated Property Price Cap

The £450,000 limit on eligible homes has not increased since the product was introduced, despite surging property prices across the UK—particularly in London, Manchester, and other key markets. This restriction forces buyers to pay a withdrawal penalty if they exceed the cap, even by a few thousand pounds, creating what MPs called a “perverse incentive to purchase cheaper properties” or incur a financial loss.

3. Confusing Dual Purpose

The LISA is pitched as a hybrid product—both a savings tool for first-time buyers and a retirement account. But the Treasury Committee argues this “dual purpose” approach confuses savers, often leading to poor decisions. For instance, those saving for retirement may opt for a cash LISA (a safer short-term option) rather than investing in equities (a more suitable long-term option), leading to inflation-adjusted losses over time.

4. Impact on Benefits

Unlike pensions, Lifetime ISAs count against means-tested benefits like Universal Credit and Housing Benefit. This means lower-income individuals might see their support reduced or removed entirely if they build up savings in a LISA. The committee called for urgent reform or clearer warnings to protect vulnerable savers from unknowingly losing out.

The Numbers Behind the Headlines

• £4,000 maximum contribution per year
• 25% bonus up to £1,000
• 25% penalty on non-compliant withdrawals
• ~6% of eligible adults have opened a LISA
• ~100,000 penalised withdrawals in 2023–24
• <57,000 used for home purchase in the same year

What’s Being Proposed?

MPs and financial experts, including campaigners like Martin Lewis, have called for the following reforms:

✅ Reduce the Withdrawal Penalty

Instead of a flat 25% penalty, some propose limiting penalties to reclaim only the government bonus, ensuring that savers at least recover their original contributions.

✅ Adjust the Property Cap

Raising or regionally indexing the £450,000 cap could better reflect modern property values and prevent unnecessary penalties for homes that barely exceed the threshold.

✅ Align with Pension Rules

Exempting LISAs from Universal Credit asset tests—or treating them more like pensions—would prevent claimants from being punished for saving.

✅ Clarify Messaging

Many users misunderstand how the LISA works. Better warnings, clearer disclosures, and stronger financial guidance could improve outcomes, particularly for first-time buyers.

What This Means for Investors

If you’re currently saving or considering investing via a Lifetime ISA, it’s crucial to review your situation:

Consideration

Advice

Emergency access needed? Avoid LISAs unless you’re confident you won’t need to withdraw early.

Buying a first home soon? Double-check local property values vs. the £450,000 cap.

Using it for retirement? Consider equity LISAs for better long-term performance—or compare with pension options.

Receiving benefits? Be aware of the potential impact on Universal Credit eligibility.

While Lifetime ISAs offer an attractive bonus on the surface, they carry structural flaws that can harm those who are not fully informed—or whose financial circumstances change unexpectedly. At De Pointe Research, we believe all savings and investment products should be designed with flexibility, transparency, and fairness in mind.

For savers seeking greater security and consistent returns, alternative assets—such as physical gold, investment-grade art, or diversified private equity—may offer more predictable performance without the penalty risks associated with LISAs.

The Lifetime ISA was launched with good intentions—but for many, it has become a financial trap. With the government expected to review ISA products later this year, reform may be on the horizon. Until then, education and diversification remain key.

If you’d like help evaluating your options or exploring alternative investments, speak to De Pointe Research today.