A warning has been issued to anyone with a Lifetime ISA amid fears it is “no longer fit for purpose.” BBC and ITV star Martin Lewis says the saving scheme proved a big hit but is starting to penalise the very people it sought to help.
Mr Lewis has warned that the scheme is “broken” but would be simple to fix – for example, by cutting the penalty to 20% and upping the £450,000 cap. Dame Meg Hillier, the chair of the Treasury committee, said: “We believe there’s a question mark over whether the lifetime Isa still serves the best interests of those it seeks to help.”
Hillier added: “While the intention [of the lifetime Isa] is admirable, the execution may be outdated. I’m concerned consumers could have better options when it comes to saving for a pension, and those putting money aside for their first house may have become locked into a product which hasn’t been updated in almost a decade and no longer caters for the purpose it was intended.
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“We’re keen to understand if that is the case and what needs to be done about it.” To date, more than 227,000 people have used money saved in one to help buy their first home and last year the average withdrawn was £14,927.
A Lifetime ISA (LISA) lets you save up to £4,000 every tax year towards a first home or your retirement, with the state adding a 25% bonus on top of what you save. But under the normal LISA rules, you can take some or all of your cash out of a LISA before age 60 even if you’re not buying a property.
But you’re charged 25% of the amount withdrawn, so it’s best to try to only use the LISA if you’re sure the cash is for one of the two defined purposes: buying a first-home costing £450,000 or less, or retirement. Withdrawals have a 25% penalty, equivalent to a loss of just over 6%.