Using a lifetime individual savings account (LISA) to save for retirement is working well for self-employed people, although changes are needed to ensure they are treated the same way as other pension savings products, the Treasury Committee has found.

The committee's inquiry into the LISA found that it is still too early to determine how the LISA is being used for retirement saving and to make firm conclusions on its suitability as a retirement savings product.

However, it recognised that there are risks for certain individuals opting to save for retirement in a LISA instead of a workplace pension, because of lower tax relief for higher- and additional-rate taxpayers and forgoing employer contributions.

The committee also found that the LISA may not be a suitable retirement saving vehicle for additional rate taxpayers.

Despite this, it suggested that the LISA can be a valuable complementary saving product for many, such as the self-employed and all basic rate taxpayers.

"Given that HMRC’s 2024 to 2025 projections are that of 37.4 million taxpayers, 29.5 million will be paying the basic rate, the LISA could provide a very useful and superior third pillar for basic rate and self-employed taxpayers," it stated.

Indeed, Hargraves Lansdown head of retirement analysis, Helen Morrissey, explained that the combination of the government bonus, alongside the ability to access the money in times of financial stress (albeit subject to an exit charge) make it a "compelling prospect".

"It could act as an ideal supplement to a workplace pension, for basic rate taxpayers who have maxed out any employer contribution," she stated.

"It can help allay concerns of those who are nervous about putting all their long-term savings into a vehicle that cannot be accessed until at least the age of 55. The ability to take a tax-free income from a LISA will also prove popular.

"At a time when the government is preparing to look at the whole issue of adequacy in retirement it’s important to remember that the LISA has an important role to play in boosting long-term financial resilience."

Evidence throughout the committee's inquiry also indicated that saving for retirement with a LISA is working particularly well for self-employed people.

Given this, the committee warned that any government reforms to the ISA market must take the interests of the self-employed into account, pointing out that self-employed people have historically achieved low levels of retirement saving.

However, the committee found that there are areas where the LISA is not treated in line with other retirement products, suggesting that some changes could be needed to address this.

In particular, the committee found that any savings held in a LISA can affect eligibility for Universal Credit or Housing Benefit, despite this not being the case for other personal or workplace pension schemes.

It also said that the government’s argument that the LISA should be included within a Universal Credit eligibility assessment because the government has contributed to the balance within the LISA is "inconsistent".

"The government provides higher levels of contribution through tax relief to many other pension products that are not included in the Universal Credit eligibility assessment, such as workplace pensions and self-invested personal pensions. Treating one retirement product differently from others in that regard is nonsensical," it stated.

Given this, it said that, if the government wants to encourage long-term saving for retirement through LISAs, it must treat the savings in a LISA in the same way as other pension savings products as part of the Universal Credit means test.

It also said that, if the government is unwilling to equalise the treatment of the Lifetime ISA with other government-subsidised retirement savings products in Universal Credit assessments, LISA products should include warnings that the LISA is an inferior product for anyone who might one day receive Universal Credit.

However, Morrissey argued that broader changes could also be needed, warning that the current withdrawal penalty could be off-putting for some self-employed workers.

"We have long argued that if the penalty could be reduced from 25 per cent to 20 per cent, this could act as a further incentive for the self-employed to get a LISA, as they know they would not be losing a chunk of their own money in the event of early access," she continued.

"We also believe that removing the age 40 limit on opening a LISA would open the product up even further given the fact that many people do not become self-employed until later in life.

"Enabling people to open a LISA and benefit from the bonus up until the age of 55 could be a gamechanger in boosting the retirement prospects of this under-served group.”

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