“This is a sensible move to ensure that lifetime Isa savers aren’t unfairly penalised if they need to withdraw money from a Lifetime Isa during this pandemic. Many people are experiencing loss of earnings that is no fault of their own, so we’re pleased that they will be able to use their Lifetime Isa savings if they need them without facing an unfair early withdrawal penalty.
“However, this does expose the flawed design of the Lifetime Isa. They were originally set-up as a halfway house between a retirement savings vehicle and a an Isa product for first time buyers. It was an unusual experiment in blending pensions and young people’s savings into a single vehicle from the then-Chancellor George Osborne, who was keen to explore alternatives to the traditional pension system. In the end that experiment has produced a botched job and now his successors are cleaning up the mess left behind.
“Lifetime Isas are neither an Isa, with the flexibility to withdraw money at any time, or a pension, which has generous tax relief but requires savers to lock-up their money to at least age 55.
“That has led to a situation where they have a penalty for early withdrawal similar to a pension. But crucially, they are treated like an Isa for a means test assessment for Universal Credit. This means that if you apply for Universal Credit, your pension is not included as a potential source of income if you’re under 55 and face a tax penalty to access it. But a Lifetime Isa is treated like an Isa and so does count against you, even though it carries a tax penalty.
“Lifetime Isas were a muddled idea to begin with. While some people have found use for them, such as using it to fund a house deposit, or set money aside for later life if they’ve already hit their pension funding allowance limit, they create as many problems as they solve. Government should look at whether they serve a sensible purpose in the long-term future of the UK’s savings system.
“There are other ways of incentivising pension saving and providing financial help to first time buyers without merging them together in a confusing hybrid product.”