Contractor sector’s ‘revamp the Lifetime ISA’ call gets an influential new backer

Long-standing appeals by the contractor sector for HM Treasury to reform the Lifetime ISA are being echoed by a respected investment platform.

AJ Bell says it has told the department’s officials that to “eradicate complexity,” six ISAs should be consolidated into a single ‘One ISA’ product, “effectively abolishing” the LISA.

A bonus system like the 25% ‘top-up’ which the LISA currently offers could be used on the account, such as to support first-time buyers, the FTSE-listed platform says in a new paper.

'More flexible'

Even post-simplification, the government should then consider making any cash top-up (which would be payable when the money is used for a specific purpose), “more flexible”.

Freelancer Financials said in March that it hoped chancellor Jeremy Hunt would use Spring Budget 2023 to reform the Lifetime ISA, to make it “fit for purpose” for contractor saving.

The contractor mortgage brokerage’s boss John Yerou said one way Mr Hunt could modernise savings was to reduce the LISA unauthorised withdrawal fee, a “whopping” 25%.

Avoidable in only three conditions (one being illness), the withdrawal fee has also been criticised by the Association of Independent Professionals and the Self-Employed.

IPSE believes that, as well as being unfairly restricted to just 18-39-year-olds, the penalty fee for early withdrawal from a LISA should be lowered or abandoned.

'Kind of support self-employed cannot get'

Introducing it in 2016, then-chancellor George Osborne said the LISA was “the kind of support” which “the self-employed…cannot get from the pensions system today.”

But at his own Spring Budget last month, Mr Hunt’s only mention of ISAs was to briefly say annual subscription limits for Junior ISAs will remain at £9,000 and adult ISAs at £20,000.

Eight days after the ISA thresholds freeze, Labour MP Dr Alan Whitehead asked the Treasury if the “potential merits” of abolishing the 25% penalty had been looked at by officials.

'Any ISA changes are for a fiscal event'

Treasury minister Andrew Griffith responded without directly answering the question.

“LISA funds, including any government bonus, can be withdrawn for the purchase of a first home valued under £450,000, in the case of terminal illness or from age 60.

“Withdrawals for any other reason are subject to a 25% fee to recoups the government bonus and any interest or growth arising from it.”

The minister added: “Government keeps the operational aspects of the LISA under review, as it does all aspects of the tax system, with any changes being announced at a fiscal event.”

'What could your ISA be worth in the long term?'

Since then, and speaking on the eve of the 2022/23 tax year ending, ContractorUK’s pensions partner Yolo Wealth urged contractors with ISAs to “review [any] available allowances”.

And yesterday online, St James’ Place Wealth Management said planning for the now underway 2023/24 tax year ought to include working out “what your ISA could be worth in the long term,” by using an ISA calculator.

Such alerts seem necessary, as a new AJ Bell study released with its proposal to reduce ISAs from six to just one, shows that while 96% adults have heard of ISAs, less than one-third knew that the annual ISA allowance is £20,000.

'Danger'

“[This] illustrates the danger that successive government interventions over two decades, leading to the creation of six different ISA variations with their own individual rules, could become a barrier that discourages saving and investing,” said the platform’s founder Andy Bell.

In a Financial Times interview, Mr Bell added: “The proliferation of ISAs worries me. If you’ve got six ISA products to choose from, you almost give up. If you were starting with a blank sheet of paper you wouldn’t design what we’ve got today.”