MPs on the Treasury select committee have called for the abolition of the Lifetime Isa (Lisa), saying it was too complex and not popular among savers.
In a report out today (26 July) the committee said the product needed to be scrapped due to its perverse incentives and its inconsistency with the other parts of the long-term savings landscape, which, it said, had contributed to its limited take-up by customers and providers.
The Lisa was introduced in April last year and is aimed at a younger generation of savers who want to save for retirement or buy a first home.
It allows those aged between 18 and 39 to save up to £4,000 each tax year into the vehicle and receive a government bonus of 25 per cent of the contribution.
The MPs argued that there was little evidence that tax relief was an effective way of encouraging potentially vulnerable households to save for a rainy day.
They said there was evidence that cash bonuses and direct matching schemes, such as the Help to Save scheme, were better at helping people build a precautionary savings buffer.
The report on household finances called on the government to help hard-pressed households to deal with debts and save for their pensions.
The MPs argued pensions tax relief, the main financial incentive the government provides for long-term saving, was not an effective or well-targeted way of incentivising saving into pensions.
It should be fundamentally reformed and the government should consider replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief, and promoting understanding of tax relief as a bonus or additional contribution.
The MPs also stated if the state pension triple lock is maintained in the long term, the state pension will rise relative to earnings indefinitely, which was unsustainable. However, replacing it with earnings-uprating could increase the number of under-savers.
This is a particular worry as there were 12 million people in the UK who are not saving enough for their retirement, according to the government’s own research.
The report says the next auto-enrolment review should explore the options for making up with private savings the shortfall that could result if the triple lock were abandoned in the future.
Nicky Morgan (pictured), chair of the Treasury committee, said: "Many households are facing challenges that are putting pressure on the health and sustainability of their finances.
"Over-indebtedness, lack of rainy day savings and insufficient pension savings are some of the weaknesses in the household balance sheet identified in this inquiry.
"The committee’s report makes a series of recommendations for the government to consider that would help households ensure that their finances are as resilient as possible.
"Whilst financial service regulators and guidance bodies have important roles to play, the government should not pass the buck to them."
The damming report also called on the government to act now to tackle the looming crisis of 12 million pension under-savers and insisted self-employed workers should be brought into pension auto-enrolment.