Here's how I'd rethink the Lifetime ISA – without scrapping the retirement benefit
The original vision for the Lifetime ISA was of a product that would literally see you through your life. It would help you take the first steps into adulthood, buy your first home, work towards goals like starting a family or going self-employed, and save for retirement. All within a single wrapper.
It's safe to say that, far from achieving this, the LISA in its current incarnation is massively complicated. And that’s why we welcomed the Treasury Committee's call for evidence in February last year.
Twelve months on, the discussion has crystallised around a handful of key proposals with one of the most talked about being scrapping the retirement aspect.
In my view, this would be a mistake. I agree we need to make the LISA less complicated. But this is not where consumer confusion lies. The real issue is the LISA’s overly rigid and unclear rules.
Right idea, wrong approach
The LISA’s age restrictions – being unable to open one if you’re over 40 or to contribute beyond age 50 – are features that put consumers off. But, equally, the rules around the home purchase aspect diminish its appeal.
While the average UK house price is still well under the £450,000 LISA cap, according to the latest Halifax and Nationwide figures, it's much higher in London and southern England. This makes it difficult for first-time buyers in those areas to use their LISA pot without triggering the 25% withdrawal charge.
At first glance the withdrawal charge looks like a simple repayment of the bonus, but it does in fact include a penalty. Alongside the government bonus, savers who use their pot for a non-permitted purpose effectively lose 6.25% of their own money. I’d argue this is difficult to justify from a policy perspective.
Don’t simplify LISAs by removing the easiest bit
On the core principle behind the Treasury Committee's call for evidence, I wholeheartedly agree. The LISA is in dire need of simplification. But scrapping the retirement aspect risks throwing out the baby with the bath water.
For one, it's a missed opportunity to get more people to save more – or start saving in the first place.
More critically, the home purchase aspect, not the retirement aspect, is where most of the LISA's complexity lies. Why look to remove the bit of the LISA that is straightforward?
So, how would I approach this?
In my February 2025 piece, I proposed three changes I believe would massively boost the LISA's appeal:
- Bring down the withdrawal charge from 25% to 20%, so that savers no longer forfeit a chunk of their own money if they use their pot for a non-permitted purpose;
- Scrap the £450,000 property price cap, or, at least, linking it to inflation. As things stand, this only serves to unfairly penalise first-time buyers in more expensive housing markets;
- Scrap age-related rules, so savers over 40 can open LISAs and it's possible to keep saving beyond age 50.
In truth, though, I'd argue we should be asking ourselves a bigger, more pertinent question. Namely: what is the ultimate government policy goal of the LISA? And how could we position the product to make it more effective at achieving this goal?
As with any other government-backed savings initiative, I think it's safe to assume that the overarching objective is to build wealth by making saving more accessible to more people and encouraging savers to set aside more money, sooner.
On that measure, the LISA as it currently stands isn't succeeding.
But taking away the retirement feature won't help further that objective, either. What we should do instead is get clear on how savers think about money, then rethink the LISA so that it meets their needs more closely.
Meeting savers where they are
People need more help to save for their future life, not less. Pensions are key, of course, but most people still find them too complex – a trend that cuts across age groups and salary brackets.
While an overwhelming majority agree that pensions are worthwhile because of employers' contributions, most struggle with the technical aspects, including working out how much tax relief they receive.
More worryingly, there's a distinct lack of engagement with pensions, particularly among younger people, for which complexity is partly to blame.
Here at NatWest Cushon, we’re all about making pensions simpler and more engaging for savers and employers. But there’s still the fundamental issue that setting money aside for 30 years' time isn't a message that resonates strongly with younger people.
Understandably, they want to focus on earlier goals, like buying a house, that older generations often took for granted. On paper, the LISA should enable them to do both.
Let's put the 'Lifetime' back in LISA
It's not hard to see how LISAs could bridge the gap between policy and practical reality.
On the issue of complexity, 'get £25 from the government for every £100 you put in' is an easier concept to grasp – and a more immediately tangible benefit – than 'get tax relief at your marginal rate'.
More significantly, LISAs are more aligned with the order in which the average person typically experiences financial pressure.
For younger savers, the biggest priority is getting on the property ladder. A product that helps them do that, and, once they reach that goal, encourages them to keep saving, is more appealing than one that only lets them access their money in very limited and specific circumstances.
For lower earners, LISAs provide tax incentives that are at least as generous as auto-enrolment.
Lowering the withdrawal charge to 20% would also make it possible for them – and for the self-employed – to use a LISA as a rainy-day fund without facing a penalty. All while keeping open the option of further saving down the road.
Ultimately, shouldn’t the LISA be about making it easy for as many people as possible to save for the future?
Supplied by REBA Associate Member, NatWest Cushon
NatWest Cushon is a workplace pensions and savings provider with an award-winning proposition.
