The Government has not acted on the Treasury Committee’s calls to reform the Lifetime ISA (LISA), according to MPs.
MPs said the LISA does not properly support people who need financial help and called for it to be changed.
The committee added that LISA savings should be treated like pension savings in the universal credit means test.
Without this, MPs said LISAs should carry clear warnings that they could put people at a disadvantage if they ever claim universal credit.
The Government noted that it would look at adding a warning, but stopped short of making any firm promises.
MPs also warned that the LISA’s design may be pulling people away from better products and putting some savings at risk.
The Government said it would work with LISA providers to improve messaging, but gave no detail on how this would work.
Chair of the Treasury Select Committee, Dame Meg Hillier MP, 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 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 whether the LISA is a good use of taxpayers’ money.”
Hillier added: “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.”
Kevin Mountford, personal finance expert and co-founder of Raisin UK, said: “I think it is fair to say that whilst LISA products were launched with good intentions in reality they have failed to achieve the desired customer outcomes.
“Firstly, the overall take-up has been low with only around 6% of eligible adults taking out such a product and this could well reflect the fact that they are overly complicated.
“Plus they do seem to be more suited to first time buyers than those using a LISA to support retirement.”
Mountford added: “There are also an increasing number of product holders who, due to unforeseen circumstances, are actually losing money which again reflects a flaw in the design.
“It is clear that overall ISA products have been a great success and by now we would have expected some ISA related announcements from the Government and ideally this would be focused on simplifying the overall ISA range but with the current economic challenges that the Government is facing I doubt that improving ISA take-up will be a priority.”
