The launch of the LISA (Lifetime ISA) in 2017 was not the success the government had hoped for. Relatively few savers seemed keen on taking them out, despite the chance to receive £1,000 of free cash from the government each year.
Now there are calls to scrap the LISA. What will this mean for people who have already opened their LISA?
What exactly is a LISA?
The LISA is an extension of the ISA range, and like the rest of the Individual Saving Accounts family provides a tax-free wrapper for cash savings, or stocks and shares investing. Unlike other ISAs, the money can be used for just two specific purposes. The first is for first-time buyers to use towards a deposit for a home. The second is for retirement.
There is a limit of £4000 a year for saving into a LISA, but if you make that maximum contribution, the government will add another £1000 each year. Free money from the government, on top of interest or investment returns sounds an irresistible. But not only are many potential savers resisting the LISA, there are calls to scrap it, just 16 months after it was launched.
What went wrong for the LISA?
Official figures revealed 166,000 LISAs had been taken out over the first year of LISA availability, some 34,000 less than the government’s forecast 200,000 for the period. The government had predicted the average contribution would be £3,500, but contributions have averaged just £3,114. Overall, this means LISA inflows are around £180m down on official expectations.
The problems seem to be the restrictions on who can take out an LISA, and on what you can do with it once you have.
First, you must be between 18 and 40 to start a LISA. This is a large target group, but many people in it are faced with plenty of other financial demands as they start to make their way in the world, shortly followed by the pressures of families and homebuying.
While other forms of ISA can be called on in an emergency, with the LISA, your money is effectively locked away. There is a 25% penalty for early access. This is not just the 25% government bonus but 25% of the total investment if you need your money early.
Why scrap the LISA?
The Treasury Committee is appointed by the House of Commons to monitor the Treasury. In a recent report, they were scathing about the LISA, and called for it to be scrapped.
In its report, the committee spoke of the complexity of the Lifetime ISA, described its incentives as ‘perverse’.
“… there is little evidence that tax relief is an effective way of encouraging potentially vulnerable households to save for a rainy day.”
What will the Government do?
The committee might not be keen on the LISA, but for the government scrapping it now could cause even more problems. At the very least, savers who have tied their money into a LISA could find themselves stuck in their current deal. This leaves those who are unhappy with their current deal with no way to switch – and no way to withdraw their money without paying a hefty penalty. If the government caved in to pressure to scrap the LISA altogether, it would risk uproar from those all important younger voters who had already invested.
What is more likely is that the rules around the LISA may be relaxed – possibly giving savers greater freedom, and making the LISA simpler and even more worthwhile.
At Continuum we would be pleased to help you with your savings plans – whether or not they include a LISA.
The value of investments can fall as well as rise and you may get back less than you invested.
Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers.
yourmoney.com – Abolish Lifetime ISA, MPs demand – 26th July 2018
professionaladviser.com – MPs call for abolition of LISA just 16 months after launch – 26th July 2018