MPs found that the LISA’s dual objective to help people save for the short-term to buy a home and long term makes it “more likely consumers will choose unsuitable investment strategies”.

The product, launched in 2017, allows people under 40 to open a LISA and put in up to £4,000 each year until they’re 50. At the end of each tax year, this is topped up by a 25% bonus from HMRC. It has a £450,000 threshold cap on house purchases. 

The scheme also allows customers to save for their retirement. 

But the cross-party report, called Lifetime Individual Savings Account, adds: “Cash LISAs may suit those saving for a first home but may not achieve the best outcome for those using it as a retirement savings product, as they are unable to invest in higher risk but potentially higher return products such as bonds and equities.” 

A widespread criticism of the product is that it carries a 25% early withdrawal charge, which effectively acts as a 6.25% exit penalty on a consumer’s own savings. 

MPs note that the scheme has attracted “a surge of withdrawal charges”.

In the 2023-24 financial year, almost double the amount of people made an unauthorised withdrawal, 99,650, compared to the number of people who used their LISA to buy a home, 56,900.  

MPs say: “This should be considered a possible indication that the product is not working as intended.” 

The government is looking at reforms to LISA, expected at the autumn Budget. 

However, when Economic Secretary to the Treasury Emma Reynolds appeared before the Treasury Committee in April she defended early withdrawal penalties. 

Reynolds said: “We can’t have a risk-free option of investing for the long-term, but if you take your money out, there is not a charge. We would not have that situation.” 

Around £213m has been paid in withdrawal charges from 286,000 people in the six tax years to April 2024, the report adds. 

Since 2018–19, LISAs have been used to buy 182,500 homes. 

The average withdrawal from LISAs to buy a home in tax year 2023–24 was £15,000. 

MPs note that since 2017, 6% of adults who have ever been eligible have opened a LISA with around 1.3 million accounts still open. 

However, the report questions the value for money the scheme offers taxpayers. 

It says: “The product may not be well-targeted towards those in need of financial support and could in fact be subsidising the cost of a first home for wealthier people at a significant cost to the taxpayer.  

“As the data on this issue remains unclear, the committee urges the Treasury to measure and publish how people on different income brackets are using the product.” 

Quilter tax and financial planning expert Rachael Griffin points out: “This report should be the catalyst for serious reform. The Lifetime ISA does not sit comfortably within the wider savings system and trying to make it serve two purposes has only added to the confusion. 

“There is a clear opportunity to replace it with simpler, more targeted tools that give people the right support whether they are saving for a home or planning for later life.  

“This should be a major focus of Labour’s upcoming ISA simplification programme this summer.” 

However, Skipton Group chief executive Home Financing Charlotte Harrison says the scheme “remains a vital tool for many first-time buyers looking to get onto the property ladder”. 

Harrison adds that a recent report by the lender “forecasts that, by the end of 2027, the Lifetime ISA house purchase of £450,000 will fall below the average first-time buyer property price in 10% of local authorities in Great Britain.  

She points out: “This is compelling evidence that the purchase price limit needs to be raised to a minimum of £500,000 to ensure the LISA remains relevant for those it is designed to help.  

“We also called on the government to reduce the unauthorised withdrawal penalty from 25% to 20%, ensuring that LISA savers are not losing capital as a result of changing circumstances.” 

Treasury committee chair Dame Meg Hillier says: “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.”