SAVERS are being warned that opening a certain type of savings account could affect their eligibility for Universal Credit.
When you apply for the key benefit, the Government will take into account how much you have in savings.
One of the factors taken into account is whether you have savings in a Lifetime ISA (LISA).
A committee of MPs has just completed a review into Lifetime ISAs – and concluded the accounts may have been improperly sold to people who could be eligible for Universal Credit.
The Lifetime ISA lets you save up to £4,000 a year either towards a first home or for retirement.
The Government adds a 25% bonus of up to £1,000 a year on top of everything you save annually.
Under the current system, any savings held in a LISA can affect your eligibility for Universal Credit or Housing Benefit.
That’s despite this not being the case for other personal or workplace pension schemes.
The report said: “If the Government is unwilling to equalise the treatment of the Lifetime ISA with other Government-subsidised retirement savings products in universal credit assessments, Lifetime ISA products must include warnings that the Lifetime ISA is an inferior product for anyone who might one day be in receipt of Universal Credit.
“Such warnings would guard against savers being sold products that are not in their best financial interests, which might well constitute mis-selling.”
The committee said the inclusion of the Lifetime ISA in the eligibility assessment for these benefits is “inconsistent” with other retirement products and “nonsensical”.
It comes as Chancellor Rachel Reeves is expected to reform ISA savings.
ISAs are accounts that let you save away up to £20,000 every tax year without paying any tax on your interest or earnings.
However the Government is hoping to push more savers towards investments rather than cash savings.
What is a Lifetime ISA?
FIRST-time buyers saving into a LISA can stash up to £4,000 into this account each year tax-free.
The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.
For example, if you save £4,000, you’ll get a £1,000 bonus.
The amount you pay in is linked to your annual ISA allowance (£20,000 for 2023/24) – for example, if you pay £1,000 into your LISA, you can still pay £19,000 into other ISA products.
Any bonus you earn doesn’t count towards your ISA allowance.
You can open a Lifetime ISA with any bank, building society or investment manager that offers the product.
You can only open a LISA if you’re aged 18–39.
You can hold multiple Lifetime ISAs, although you can only pay into one each tax year.
You can also transfer your Lifetime ISA to another provider, for example, to get a better interest rate.
If you want to use a Lifetime ISA to buy a home, there are a few restrictions you need to keep in mind:
Only first-time buyers can use Lifetime ISAs to buy a home, which means you can’t own, or have owned, a home in the UK or anywhere in the world. You’ll need to be buying a home for no more than £450,000. You must be buying a home you plan to live in – the scheme isn’t for buying a home you want to rent out, or a holiday home.If you don’t use it to buy your first home, you can continue paying into a LISA until you’re 50.
You can then make full or partial withdrawal from your LISA, without paying a fee, when you turn 60.
Savers might be making ‘poorer decisions’
The review also found that Lifetime ISAs could be contributing to people making poorer financial decisions.
Many use the accounts to boost their deposit savings for their first home.
But experts have argued that restrictions placed on LISA customers have led to thousands missing out.
You can only use a LISA to purchase a home worth up to £450,000, which in many parts of the country is feasible but in the South East and London this is increasingly pricing people out.
The £450,000 limit has not changed since the LISA was first introduced in 2017.
On top of this, people withdrawing money from a LISA for any reason other than retirement or buying a first home face a 25% withdrawal charge.
At face value this looks like just losing the bonus offered by the Government, but in reality you end up losing 6.25% of your own savings too.
In the 2023-24 financial year, 99,650 people were charged the penalty.
That’s nearly double the number of people who used their LISA to buy a home (56,900).
The Treasury Committee, which released the report, said this was a possible indication the LISA is not working as intended.
The report said: “Many people have lost a portion of their savings due to a lack of understanding of the withdrawal charge or because of unforeseen changes in their circumstances, such as buying a first home at a price greater than the cap.
“However, the case for reducing the charge must be balanced against the impact on Government spending.
“The Lifetime ISA must include a deterrent to discourage savers from withdrawing funds from long-term saving.”
The Office for Budget Responsibility predicts spending on bonuses paid to account holders will cost the Treasury around £3billion over the five years to 2029-30.
Treasury Committee chairwoman 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.”
Brian Byrnes, head of personal finance at Lifetime ISA provider Moneybox, said the accounts have “proven particularly valuable for first-time buyers on lower to middle incomes, with 80% of Moneybox Lisa savers earning £40,000 or less”.
“We firmly believe that by future-proofing the house price cap and amending the withdrawal penalty, the LISA would continue to serve as a highly effective product, helping young people build and embed positive saving behaviours early in life, get more people onto the property ladder, and prepare for a more secure retirement,” he said.
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