Flaws in the Lifetime Isa system could cause savers to miss out on their goals, experts say, as the confused system is increasingly becoming unusable for account holders.
Launched in 2017, Lisa accounts allow users to save either to buy their first home, or to save for retirement, benefitting from a 25 per cent bonus from the Government.
Almost half of Lisa savers opened their account in order to save for their first home, while the other half of savers did so to save for retirement, according to new data from HMRC.
However, these dual-purpose accounts could see savers fail to successfully save for either target, with many facing early-access penalties as a result, Quilter said.
When Lifetime Isas launched, many savers jumped at the chance to benefit from a 25 per cent Government bonus.
In fact, as many as 98 per cent of account holders said the bonus was important in their decision to open the account.
Almost half of Lisa savers opened their account in order to save for their first home
With the bonus, however, also comes a punitive withdrawal fee of 25 per cent.
This means not only does a saver lose the Government bonus if they choose to withdraw their money, but the charge also eats into their hard-earned savings.
Rachael Griffin, tax and financial planning expert at Quilter: ‘The withdrawal penalty continues to punish savers even when they are facing financial strain.’
‘Many people have faced the difficult battle over the need to save for the future versus the need to pay their bills in recent years, and higher costs have often won. This has forced them to stomach the 25 per cent charge to gain access to their money.’
For people who opened these accounts to help fund retirement, many may have struggled to fund day to day expenses over the past few years as a result of the increased cost of living, meaning some may have had no choice but to access their Lisa.
As many as 86 per cent of people choosing to make unauthorised withdrawals were aware of the charges they would face, according to HMRC’s data.
Griffin said this ‘underlines how desperate people were for access.’
She added: ‘The data also shows that 42 per cent of those not currently holding a Lisa said a change to the rules so that original savings would not be lost with the withdrawal charge would be most likely to motivate them to open one.’
Meanwhile, the £450,000 house price cap stipulated by the account has not changed in the eight years that have passed since the account launched.
As a result, a large number of people who opened accounts when they were initially launched will have found that they are now unable to purchase a home that meets their needs that falls within the budget.
Since Lisas were introduced in April 2017, house prices have increased some 34 per cent.
A third of people who opened an account to save for their first home said the price cap wasn’t high enough.
For those in London though, 68 per cent said it didn’t meet their needs. Likewise, 48 per cent in the South East said it isn’t high enough.
Griffin said: ‘Put simply, the £450,000 property price cap no longer deals with the reality of the ever more expensive housing market.
‘Many who have saved diligently find they cannot use their LISA for the property they need without facing a financial penalty. This undermines confidence in the product and adds to its complexity.’
She added: ‘For first-time buyers, the Lisa has provided genuine help. Nearly a third of those who used it to buy a property said the government bonus was essential in making the purchase.
‘The majority admitted they likely would have bought anyway, just with more difficulty, reinforcing the concern that the Lisa often diverts existing savings rather than generating new ones.’
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