An influential group of MPs has called for the lifetime ISA to be scrapped in a move which will put pressure on the government to consider if they should carry on with the new savings vehicle.
The Treasury Select Committee, which does hold sway over government decisions, called for the end to the lifetime ISA in a paper on household finances. The paper also called for the lifetime allowance to be axed.
‘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 report said. ‘The government should abolish it.’
Launched in 2017 the lifetime ISA offers people under 40 an annual 25% government bonus on contributions up to £4,000 so long as the money is used to buy a house or to fund retirement – if money is taken out early a 25% tax charge is applied.
The committee was also critical of the way the government presents the 25% tax charge on its website about the product, as they argued it appears to show investors will lose their 25% bonus if they take money out early when instead they lose 25% of their capital invested.
Lifetime allowance axe
The Committee said the current pensions tax relief system is not working as it should be and needs to be reformed.
The paper called for the government to abolish the lifetime allowance (currently £1.03 million) and replace it with a lower annual allowance.
‘There is widespread acknowledgement that tax relief is not an effective or well-targeted way of incentivising saving into pensions. Ultimately, the government may want to return to the question of whether there should be fundamental reform,’ the MPs said.
‘However, the existing state of affairs could be improved through further, incremental changes. In particular, the government should give serious consideration to replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief, and promoting understanding of tax relief as a bonus or additional contribution.’
Tom McPhail, head of policy at Hargreaves Lansdown, said the move to scrap the lifetime allowance would be welcomed by the industry and savers.
‘The Committee deserves great credit for pinning the government down on its responsibility for long-term household savings, investment and financial resilience,’ he said. ‘We also welcome proposals to simplify the savings system and in particular pensions tax reliefs and limits. The Committee’s proposals for abolition of the lifetime allowance limit, offset by a lower annual allowance and a flat rate of government tax relief top up would enjoy widespread support.’
Alistair Wilson, head of retail platform strategy at Zurich, said the calls for the scraping of the lifetime ISA could mark the end of the product.
‘This could be the death knell for the lifetime ISA,’ he said. ‘Although it was well intentioned, many providers appear to have been turned off by a savings vehicle that has the complexity of a pension, but with fewer benefits for consumers.’
Meanwhile, Neil Macgillivray, head of technical support at James Hay, said that the whole project had been 'a folly' from day one.
'I’ve always been of the view that the lifetime ISA was a folly, it was rushed in and not thoroughly thought through,' he said.
'The idea of combining savings to buy a property and for retirement require completely different investment strategies and one shouldn’t be sacrificed over the other.'