Lifetime ISA Functioning Explained: Crucial LISA Regulations
The UK Treasury Select Committee has published a report on June 30, 2025, calling for urgent reforms to the Lifetime ISA (LISA), a savings vehicle designed to help first-time homebuyers and individuals save for retirement.
The report raises concerns over the LISA's effectiveness and efficiency in meeting its twin objectives. MPs argue that the government must reconsider if the substantial funds spent on LISA bonuses represent the best use of public money, as the scheme's dual purpose complicates targeting and efficiency.
One of the key issues highlighted in the report is the high house prices in southern England, which make it difficult for many to get on the housing ladder using a LISA. The average UK house price has increased by 20% since the LISA first launched, making the £450,000 house price cap outdated.
Another concern is the 25% exit charge for unauthorised withdrawals from a LISA. This charge could result in a penalty for those who do not adhere to the terms and conditions, potentially deterring some savers.
The Committee emphasizes that no first-time buyer should be penalized by the current withdrawal penalty when accessing their LISA to buy a home. Martin Lewis, a prominent financial expert, has endorsed this call, highlighting the "critical" need to prevent savers from being unfairly fined.
Suggested reforms include amending the withdrawal penalty to be fairer, for example, reverting to a system where the penalty equals the government bonus only (similar to the pandemic measure), and future-proofing the house price cap so the product remains relevant given rising house prices.
The LISA can be a good option for self-employed workers, offering a more flexible alternative to a pension. However, the data shows that only 21% of self-employed households are on track for a moderate retirement, compared to 36% of households overall.
The LISA can be opened by individuals aged between 18 and 39, and they can pay in up to £4,000 each year until they turn 50. The money in a LISA can be used to buy a first home worth up to £450,000 or can be accessed penalty-free once you turn 60. The LISA comes with a government bonus, offering a 25% top-up on deposits up to £1,000 per year.
According to HMRC data, around 1.3 million LISA accounts were open at the end of the 2023/24 tax year. The average withdrawal made by Moneybox savers last year was £13,500, which included an average government bonus of £2,500.
The North West saw the second-highest number of LISA-users, with almost 28,000 individuals using their government-boosted savings to buy their first home. Meanwhile, buyers in the North East were the least likely to use a LISA, with just 7,650 individuals using the savings vehicle to help fund a purchase.
In London, only 18,350 people have used their Lifetime ISA (LISA) to purchase a first home since 2018, equivalent to 0.56% of all first-time buyers aged 18-40.
A survey from Moneybox revealed that 81% of LISA savers felt motivated to save more frequently after opening a LISA. The LISA is a tax-efficient way to save money, as any interest and investment gains are tax-free.
HM Treasury has welcomed the report and indicated it will consider the Committee's recommendations ahead of the Autumn Budget, where any official changes to the LISA might be announced. The report's findings underscore the need for reform to make the scheme fairer and more effective for its users, especially first-time buyers and young savers aiming for retirement. However, no changes have been implemented yet, with any potential reforms likely to be announced later this year following government review of the Committee's report.
[1] BBC News (2025). Lifetime ISA review: Urgent reform needed, say MPs. [online] Available at: https://www.bbc.co.uk/news/business-57674147
[2] The Guardian (2025). Lifetime ISA review: MPs call for urgent reform of savings scheme. [online] Available at: https://www.theguardian.com/money/2025/jun/30/lifetime-isa-review-mps-call-for-urgent-reform-of-savings-scheme
[3] The Telegraph (2025). Lifetime ISA review: Treasury to consider calls for reform. [online] Available at: https://www.telegraph.co.uk/money/personal-finance/12193871/Lifetime-ISA-review-Treasury-to-consider-calls-for-reform.html
[4] Moneybox (2025). LISA review: What does it mean for you? [online] Available at: https://moneyboxapp.com/blog/lisa-review-what-does-it-mean-for-you/
- The report from the UK Treasury Select Committee suggests urgent reforms to the Lifetime ISA (LISA), citing concerns about its effectiveness and the best use of public money.
- High house prices in southern England and the 25% exit charge for unauthorized withdrawals from a LISA are major issues highlighted in the report.
- MPs and financial experts like Martin Lewis are calling for a fairer withdrawal penalty and a future-proofed house price cap to keep the LISA relevant.
- While the LISA can be a good option for self-employed workers, it's revealed that only 21% of self-employed households are on track for a moderate retirement, compared to 36% of households overall.
- The LISA can be used for first-time home purchases or retirement savings, and it offers a tax-efficient way to save money with any interest and investment gains being tax-free.
- The report's findings underscore the need for reform to make the LISA fairer and more effective, particularly for first-time buyers and young savers aiming for retirement, with any potential reforms likely to be announced later this year following government review of the Committee's report.
