The Government has failed to set out a plan for reforming the lifetime ISA (LISA), according to the Treasury Select Committee.

The Committee revealed it is “unconvinced” that the LISA effectively targets people in genuine need of financial support and said the Government had not heeded the Committee’s warnings over the need for reform.

A recent report by Treasury Committee on the LISA criticised their complexity and had highlighted that reforms to the early withdrawal charge and maximum property purchase price could boost their appeal.

MPs also called for LISA savings to be treated in the same way as other pension savings in relation to the Universal Credit means test. In the absence of such reform, the Committee has argued that LISAs should be labelled as an inferior product and include warnings that they may disadvantage anyone who might one day claim Universal Credit.

The findings of the Committee also warned that the LISA’s dual-purpose design may be diverting people away from more suitable products and putting part of their savings at risk.

Chair of the Treasury Select Committee, Meg Hillier said: “The Government has taken some steps towards improving the LISA, but I do not believe they have gone far enough. The LISA is a confused product that requires reform.

“Recently published research by HMRC based on a sample of LISA holders found that 87% of those who had used their LISA to buy their first home said that they could have done so without their LISA. Given that the LISA is forecast to cost the Government £3bn over the next five years, this raises the question whether the LISA is a good use of taxpayers’ money.

“The Government has an opportunity at the Budget to think again on the LISA for would-be first-time buyers and those saving for retirement alike.”

In response to the Committee’s findings, the Government has committed to working with LISA providers to improve the messaging around the product. However, it did not set out what this would look like in practice.

Head of public policy at AJ Bell, Rachel Vahey, commented that the Treasury Committee was “clearly frustrated” with the Government’s inaction on the LISA.

“Rather than a ‘wait and see’ response, the Treasury Committee wanted to see action and a plan for reform put in place,” Vahey said. “But the Government has thwarted those wishes.”

She added: “AJ Bell has long campaigned for reducing the punitive early withdrawal penalty. Even the best-laid plans often go awry and it is unfair to punish people with an exit charge that goes beyond simply recovering the government-funded bonus. Reverting to the system used during the pandemic, when the penalty only matched the original bonus received on the account, would be a fairer approach.

“The Government currently has ISAs on the examination table, taking a good hard look at how ISAs help people invest and save for their future. Hopefully it will also prioritise looking at how it can help more young people benefit from a LISA.”

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