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.
However, it argued the government has no clear strategy or timetable for doing so and called on it to consider making use of self-assessment and national insurance contributions to auto-enrol the self-employed.
This comes as the report highlights the growing concern about the number of self-employed, including gig economy workers, who are not covered by pension auto-enrolment.
Industry has responded with criticism to the call for the abolition of the Lisa with Skipton Building Society saying this would "let down a generation of savers".
The firm called on the government to ignore the recommendation. Kris Brewster, Skipton’s head of products, said: "Originally, the government aspired to see 200,000 Lifetime Isa accounts opened in the first wave of activity.
"At Skipton, in just over one year, we have opened over 112,000 accounts for our members. We believe the Lifetime Isa can make a real difference for people wanting to get on the housing ladder."
Tom McPhail, head pf policy at Hargreaves Lansdown, praised the committee for pinning the government down on its responsibility for long-term household savings and financial resilience.
But although he said the proposal to abolish the Lifetime Isa addressed the concern that the savings landscape has become over-complicated, he warned the Lisa had proved popular among savers.
He said: "The Lisa is proving popular with those who are eligible so we’d want to see a proper consultation process before the government took any steps in this direction.
"A root and branch review and simplification of retail savings and tax incentives would be welcome but is almost certainly beyond the capabilities of this government, certainly until Brexit is resolved."
Laura Suter, personal finance analyst at AJ Bell, said: "The Lifetime Isa has introduced complexity but there is a danger that scrapping it 18 months after introducing it, just as the product is becoming established, would further dent consumer confidence in the savings market.
"Such a drastic move should be considered within the context of wider changes that could help savers."
The MPs advised the Treasury to report on the state of household finances in the next Budget and identify the key risks to the financial resilience of households, and set out its strategy for addressing them.
Phil Andrew, chief executive of StepChange debt charity, who gave oral evidence to the committee as part of its enquiry, said: "The committee’s report shows a clear understanding of the debt landscape, a keen awareness of where problems lie, and a robust identification of who has the power to solve them.
"We look forward to working constructively with policymakers to help them address the problems set out so cogently in the report."
Alan Lakey, director of CIExpert and Highclere Financial Services, agreed the savings space was too complex and said the government could introduce a "simple to understand savings plan that can be accessed early but recognises longer term savings with some additional bonus."
He said: "One problem has been the constant change that has taken place - removal of child trust fund, introduction of Junior Isas, adjustment of Isa allowances, introduction of first £1,000 interest being tax-free, introduction of Help to Buy Isa - for most people it is all too confusing and they have to rethink strategies.
"On the basis that simplicity works it would be far better to have just the one Isa."
aamina.zafar@ft.com
