Martin Lewis issues call for 'critical' action on Lifetime ISA fines as new Treasury Committee report urges reform

The warning comes as the Treasury Select Committee – which is made up of a cross-party group of MPs – has today (Monday 30 June) published a report also urging for LISA reform. This comes ahead of a general review of the ISA landscape by the government, which is imminently expected.

Martin Lewis: 'This flaw doesn't just hurt those with LISAs – it puts off many young people'

Martin has long campaigned for LISAs to change – highlighting that the scheme's £450,000 house price limit has remained frozen since it launched in 2017, despite house prices rising significantly since then. This has left some first-time buyers unable to find a suitable property under the limit, and savers buying a home that no longer qualifies are then effectively charged a 6.25% penalty to withdraw their funds.

Why first-time buyers shouldn't be fined to access their cash

The Committee's report referenced comments made by Martin during an evidence session on the topic in February. The report states: "Some respondents drew out the unfairness of the withdrawal charge particularly for those using their LISA savings to buy a home that exceeded the house price cap, resulting in a penalty on their own savings.

"Martin Lewis has campaigned for a reduction in the withdrawal charge to 20%. He told us: 'I have no problem with the withdrawal penalty in its own right. I have a problem with it for first-time buyers buying a house.

"We have a succession of young people who are saving in the vehicle they have been encouraged to save in by the state, who are then trying to use their savings to buy a first-time property, but due to house price inflation their property has just tripped above the £450,000 level.

"Then not only do they not get the £1,000 a year bonus they were intended to get, which I understand is legitimate as a threshold, but they are fined by the state effectively 6.25% of their own money in order to withdraw that money to get the cash out.'"

The Committee added that the "increasing number of people" making unauthorised withdrawals and incurring the withdrawal charge, "may indicate that the LISA is not working as intended". It highlighted HMRC stats, which reveal that £213 million in withdrawal charges was taken from more than 286,000 savers in the six tax years to 2023-24. The average value of an unauthorised withdrawal in 2023-24 was just over £3,000.

However, the Committee said "the case for reducing the charge must be balanced against the impact on Government spending" and stated that it believes the LISA "must include a deterrent" to discourage savers from withdrawing funds.

You can watch a clip from Martin's Treasury Committee evidence session earlier this year here:

The fine may disproportionally affect those with lower incomes

The report continued: "We heard that the withdrawal charge may disproportionately affect those with lower incomes and limited financial resilience, as they may be especially deterred by the penalty.

"Martin Lewis told us: 'As with all things, the more financially educated you are, the more you tend to engage in products. The less financially educated you are, the less you tend to engage in products. When there is an off-putting thing like a penalty, that will disproportionately go to those who are less financially educated, who tend to be those from lower income backgrounds.'"

However, the Committee cautioned that LISA data concerning its use by its target market is "mixed and inconclusive". Adding that is is "concerned that LISA bonuses may involve significant spending of taxpayers' money in a way that may not be precisely targeted".

As such, the Committee has recommended the Treasury use income distribution impact assessments to check whether the LISA effectively targets people who need financial support. Adding that if it doesn't, the Treasury should consider "whether the LISA has a future in its present form".

A rise in the house price cap would make the LISA more effective

On the importance of the LISA house price cap in relation to the withdrawal penalty, the report stated: "Many witnesses proposed increasing the price cap. Some argued that any changes to the price cap should be considered alongside changes to the withdrawal charge and that the two issues should not be considered in isolation.

"Martin Lewis noted that '[t]he argument over the level of the cap is a subsidiary argument to the withdrawal penalty. If you have a withdrawal penalty, the cap is absolutely crucial.'

"Several witnesses suggested that a rise in the price cap in line with house price inflation would make the LISA more effective."

The report concluded that the house price cap "ensures that Government spending supports those who need financial assistance the most". It also cautioned that "any increase in the price cap is an increase in Government spending".

Other points raised in the report

The Committee's report also recommends the Government:

• Look at whether the dual aspect of the LISA works. The Committee said the "disparate objectives" of the LISA – in terms of supporting first-time buyers and encouraging long-term retirement savings – "might require separate tailored policies". It also pointed out that some LISA providers only offer a cash version of the product, which "may not achieve the best outcome... over the long term compared with investing in higher risk but higher return assets".

• Consider whether the LISA is a suitable retirement vehicle for everyone. The report recognised that LISAs "could provide a very useful and superior third pillar for basic rate and self-employed taxpayers" and stated that any reforms should take the interests of the self-employed into account.
  
  It also recommended that the point at which people use their LISA to purchase a property offers an opportunity for the Government or providers to explain the retirement savings elements of the product. However, the report pointed out that LISAs "may not be suitable for additional rate taxpayers" who can get greater benefits from a workplace pension.

• Treat savings in a LISA in the same way as other pension savings products as part of the Universal Credit means test. Or at least include warnings that the LISA is an "inferior product" for anyone who might one day be in receipt of Universal Credit – without such, the Committee warned that it "might well constitute mis-selling".
  
  Currently, savings in a LISA are included in the eligibility assessment for Universal Credit, which the Committee says is "inconsistent" with other retirement products. The report added that treating one retirement product differently from others in this regard is "nonsensical".

• Check whether the LISA as a whole is value for money. The report states that "given the scale of demand on the public finances, the Government must carefully consider whether significant spending on the LISA is the best way of achieving its policy objectives".

Chair of the Committee: 'The Lifetime ISA needs to be reformed'

Chair of the Treasury Select Committee, Dame Meg Hillier, said: "The Committee is firmly behind the objectives of the Lifetime ISA, which are to help those who need it onto the property ladder and to help people save for retirement from an early age. The question is whether the Lifetime ISA is the best way to spend billions of pounds over several years to achieve those goals. 

"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.  

"We are still awaiting further data that may shed some light on who exactly the product is helping. What we already know, though, is that the Lifetime ISA needs to be reformed before it can genuinely be described as a market-leading savings product for both prospective homebuyers and those who want to start saving for their retirement at a young age."

An HMT spokesperson added: "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."