The future of the Lifetime Isa is in doubt just weeks after a second provider finally started offering accounts to young savers.
Lifetime Isas allow adults under 40 to save for their first home or pension in one pot with a 25 per cent bonus from the Government. They were revealed in the 2016 budget and launched in April 2017.
However, the Treasury Committee has today called for them to be scrapped due to their ‘perverse incentives and complexity.’
Under threat: Just two providers offer a savings version of a Lifetime Isa showing a lack of appetite from banks and building societies
Concerns have previously been raised that if people are saving for later life into a Lifetime Isa, it could discourage them from saving into a workplace pension.
In the latter, they get the benefit of employer contributions into their pot.
Critics have also argued that a home and a pension are two very different savings goals.
The committee said: ‘This inquiry has received strong criticism of the Lifetime Isa over its complexity, its perverse incentives, its lack of complementarity with the pensions saving landscape and its apparent lack of popularity with the industry and pension savers.
‘The Government should abolish it.’
The Lifetime Isa has been a relative flop since being made available in April 2017. For more than a year, only one provider offered them, Skipton Building Society, with a 0.5 per cent rate.
This is offset by the bonus the Government gives. On the maximum £4,000 that is allowed to be saved, there is a potential £1,000 bonus on offer.
Last month, Nottingham Building Society became savings provider number two to make a Lifetime Isa available, with a 0.75 per cent rate.
The lack of appetite from banks and building societies may give an indication about how it is seen as a gimmick with a short shelf life.
Investment firms have been a touch more interested, but even then just six offer stocks and shares versions.
You must be under 40 to open a Lifetime Isa and you can pay in money until the age of 50 to earn the 25 per cent bonus on contributions.
However, it has to go on a first home or you can’t access it until the age of 60, without a hefty penalty.
Furthermore, MPs have urged that stronger action is needed to help hard-pressed households with debts save for a rainy day and pension.
The committee’s wide-ranging report said households are facing a series of challenges ‘that are putting the health and sustainability of their finances under pressure.’
This includes pressures from weak income growth, the growth of the gig economy and self-employment and an ageing population.
It said the Government’s principal savings incentive takes the form of tax relief on interest, mainly through Isas.
The committee continued: ‘Yet there is little evidence that tax relief is an effective way of encouraging potentially vulnerable households to save for a rainy day.
‘There is, however, more evidence that cash bonuses and direct matching schemes, such as the Help to Save scheme, are better at helping people build a precautionary savings buffer.
‘The Government should update Parliament on the usage of such schemes and its efforts to increase take-up. It should also consider widening the eligibility criteria.’
House vs pension: Critics argue that saving for either of the two are completely different goals
Looking at pension saving, the committee highlighted a previous review which found there are still 12million people in the UK who are not saving enough for their retirement. This is creating a ‘looming crisis’ it said.
It also highlighted growing concerns about self-employed people who have not been brought into workplace pension saving under automatic enrolment.
The committee said: ‘There is, therefore, an urgent need to bring the self-employed into the auto-enrolment system, but the Government has no clear strategy or timetable for doing so.
‘The Government should consider making use of self-assessment and national insurance contributions to auto-enrol the self-employed.’
In the next Budget, the Treasury should report on the state of household finances, identify the key risks to the financial resilience of households, and set out its strategy for tackling them, the committee said.
Nicky Morgan, who chairs the Treasury Committee, said: ‘Many households are facing challenges that are putting pressure on the health and sustainability of their finances.
‘Over-indebtedness, lack of rainy day savings and insufficient pension savings are some of the weaknesses in the household balance sheet identified in this inquiry.
‘The committee’s report makes a series of recommendations for the Government to consider that would help households ensure that their finances are as resilient as possible.
‘Whilst financial service regulators and guidance bodies have important roles to play, the Government should not pass the buck to them.’
The Treasury Committee is appointed by the House of Commons to examine the expenditure, administration and policy of HM Treasury, HM Revenue & Customs, and associated public bodies, including the Bank of England and the Financial Conduct Authority.
LIFETIME ISAS: THE BASICS
To open a lifetime Isa you need to be aged 18-40.
You can choose between an investment Lifetime Isa and a cash one. There are currently seven providers offering a the former, and until Nottingham BS launches later this summer, Skipton BS is the only one available for cash savings.
The investment options are offered by OneFamily, The Share Centre, Nutmeg, Hargreaves Lansdown, Moneybox, AJ Bell, Foresters Friendly Society.
On top of interest or profits you get a cash bonus worth up to £1,000 a year added to every £4,000 saved into a Lifetime Isa each year.
You must use the cash to either buy your first home or wait until the age of 60 to withdraw it for use in retirement.
Otherwise you face a hefty penalty of 25 per cent on any withdrawals unless you need the money as you are terminally ill. That’s 25 per cent of your whole balance including deposits, interest or profit.
The 25 per cent bonus is paid up until you reach the age of 50. If you max this out, it’s worth up to a £32,000 boost from the Government.
If you want to use the cash to buy a house it can be worth up to £450,000.
The lifetime Isa effectively took over from the Help to Buy Isa which will be closed in November 2019.
If you already have one of these you can transfer over the savings if you wish. To find out more read out guide to Help to Buy Isa vs Lifetime Isa.
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