Reeves told Lifetime ISAs rules are ‘nonsensical’ and costing savers
Lifetime ISAs require deep reform, as strict rules on cash withdrawals mean customers are left with less money than they initially deposited, leading Britons to make worse investment decisions, while the government sets aside too much spending for bonuses, senior MPs have told Chancellor Rachel Reeves.
Reeves is a fortnight away from her flagship Mansion House speech in which she is expected to announce reforms to savings plans and boost the UK’s retail investment culture.
Senior MPs on the Treasury Select Committee have highlighted severe faults with the Lifetime ISA, introduced under former Chancellor George Osborne, as Britons could be better off investing in “higher risk but potentially higher return products such as bonds and equities”.
The type of savings account allows individuals under the age of 40 to put cash aside for their first home or retirement, with the government adding a bonus worth up to £1,000 on contributions made by holders.
Funds can only be withdrawn tax free after the age of 60 or for the purpose of buying a home worth up to £450,000.
A new report published by the Treasury Select Committee points out that the surge in charges last year for 99,560 unauthorised withdrawals suggested the tax wrapper was not working as intended.
The 25 per cent charge meant holders faced losing 6.25 per cent of their own savings, MPs suggested.
The committee also questioned whether £3bn in government spending set aside for Lifetime ISA bonuses in the five years to 2030 represented good value for money, “given the current strain on public finances”.
Rules which penalised benefits claimants were also described as “nonsensical” as people who hold savings in a Lifetime ISA may be less likely to receive certain types of Universal Credit.
Treasury Select Committee chair Meg Hillier said MPs generally supported the usefulness of the Lifetime ISA for self-employed workers and helping first-time homebuyers, though they questioned whether it warranted high levels of government expenditure being set aside.
“The question is whether the Lifetime ISA is the best way to spend billions of pounds over several years to achieve those goals,” Hillier said.
“We know that the Government is looking at ISA reform imminently which means this is the perfect time to assess if this is the best way to help the people who need it.
Reeves is believed to be considering lowering the limits individuals can contribute to cash ISAs as part of an effort to get more Brits to invest in UK assets through the stocks and shares ISA.
The average rate of return for an average stocks and shares ISA between 2024 and 2025 was 11.9 per cent compared to just 3.8 per cent for a regular cash ISA, according to Moneyfacts.
A government spokesperson said: “Lifetime ISAs aim to encourage younger people to develop the habit of saving for the longer term, helping them to purchase their first home or build a nest egg for when they’re older.
“We welcome the committee’s report and will now review its findings and respond in due course.”
Reeves expected to highlight pension reforms
Reeves’s Mansion House Speech on July 15 is also expected to highlight key pension reforms and auto-enrolment, which have been laid out by minister Torsten Bell in the Pension Schemes Bill.
The Federation of Small Businesses (FSB) have warned that new rules expected in the second phase of the government’s pensions review later this year could put more pressure on companies across the UK, which could in turn lead to higher prices and fewer workers recruited.
The changes most feared are the doubling of employer pension contributions, which more than a third of firms surveyed by the FSB say could lead to fewer workers being hired, and a lower threshold on employer pension contributions falling from £6,240 to zero, which half of firms said would lead to higher prices.
Tina McKenzie, Policy Chair of the Federation of Small Businesses, said: “Entrepreneurs have taken on auto-enrolment, absorbed the costs, navigated the jargon, and kept paying into their staff’s pensions even when their own margins have fallen. But goodwill has limits.
“The more complex and expensive the system becomes, the more we risk pushing employers from willing participants into reluctant bystanders.”
“This is not about resistance to pension reform, it’s about the cumulative burden of regulation and the rising cost of employment.
“Small firms are already feeling the pinch – NICs and wage increases are really taking their toll – and any new reforms could push many to breaking point.