A committee of MPs has said the Government has not heeded warnings from it that the Lifetime Isa (Lisa) needs reform.
In a previous report, the Treasury Committee said it was unconvinced that the Lisa effectively targets people in genuine need of financial support.
But it said on Thursday that the Government has not taken the opportunity to set out a plan for reform.
Lisas are aimed at people saving for their first home or their retirement.
People can put in up to £4,000 each year until they are aged 50. Savers must make their first payment into their Lisa before they are 40.
The Government will add a 25% bonus to Lisa savings, up to a maximum of £1,000 per year.
When someone turns 50, they will not be able to pay into their Lisa or earn the 25% bonus, but their account will stay open and the savings will still earn interest or investment returns.
Savers can withdraw money from their Isa if they are buying a first home worth £450,000 or less, aged 60 or over or terminally ill with fewer than 12 months to live.
A withdrawal charge of 25% may apply if someone withdraws cash or assets for any other reason.
MPs have also called for Lisa savings to be treated in the same way as other pension savings in relation to the universal credit means test.
In the absence of such reform, the committee argued that Lisas should be labelled as an inferior product and include warnings that they may disadvantage anyone who may one day claim universal credit.
It said the Government’s willingness to consider including such a warning is welcome but falls short of a concrete commitment to address the issue.
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MPs had also warned that the Lisa’s dual-purpose design may be diverting people away from more suitable products and putting part of their savings at risk. The Government has committed to working with Lisa providers to improve the messaging around the product, but it did not set out what that would look like in practice, the committee said.
Treasury Committee chairwoman Dame Meg Hillier said: “The Government has taken some steps towards improving the Lifetime Isa, but I do not believe they have gone far enough. The Lifetime Isa is a confused product that requires reform.
“Recently published research by HMRC (HM Revenue and Customs) based on a sample of Lisa holders found that 87% of those who had used their Lisa to buy their first home said that they could have done so without their Lisa. Given that the Lisa is forecast to cost the Government £3 billion over the next five years, this raises the question of whether the Lisa is a good use of taxpayers’ money.
“The Government has an opportunity at the Budget to think again on the Lisa for would-be first-time buyers and those saving for retirement alike.”
In its response to the Treasury Committee’s report, the Government said it is “committed to making Isas, including Lifetime Isas, as simple and flexible as possible”.
It said that as of 2023/24, more than 1.3 million Lisa accounts were open and, since its introduction in 2017, the Lisa has helped 227,600 people buy their first property.
It said: “To ensure the product is well targeted, the property price cap (£450,000) supports most first-time buyers across the UK, including those households who may find it difficult to get onto the property ladder.”
The withdrawal charge ensures that the Lisa has been used for its intended purposes of homeownership for first-time buyers or later life savings, the Government said.
It said the Lisa is a savings product and “as with other savings and investment products, it counts towards the calculation” of universal credit.
It added: “We will work with industry and other Government departments to consider ways to improve the messaging about the implications of savings and investments might affect entitlement to universal credit.”
A Treasury spokesperson said: “Across the vast majority of the country and in most London boroughs, the average price for a first-time home remains below the £450,000 Lifetime Isa cap.
“We are also committed to building 1.5 million more homes so that people can turn the dream of owning a home into a reality.”
