Scrap lifetime ISA and give households more help to save

The Treasury Committee also called for the Lifetime Isa to be scrapped due to its “perverse incentives and complexity”.

Lifetime Isas allows people to save for their first home or their pension in one pot. But concerns have previously been raised that if people are saving for later life into a Lifetime Isa, it could discourage them from saving into a workplace pension, where they get the benefit of employer contributions into their pot.

Critics have also argued that a home and a pension are two very different savings goals.

The committee said: “This inquiry has received strong criticism of the Lifetime Isa over its complexity, its perverse incentives, its lack of complementarity with the pensions saving landscape and its apparent lack of popularity with the industry and pension savers.

“The Government should abolish it.”

The committee’s wide-ranging report said UK households are facing a series of challenges “that are putting the health and sustainability of their finances under pressure”, including pressures from weak income growth, the growth of the gig economy and self-employment and an ageing population.

It said the Government’s principal savings incentive takes the form of tax relief on interest, mainly through Isas.

“Yet there is little evidence that tax relief is an effective way of encouraging potentially vulnerable households to save for a rainy day,” it said.

“There is, however, more evidence that cash bonuses and direct matching schemes, such as the Help to Save scheme, are better at helping people build a precautionary savings buffer.

“The Government should update Parliament on the usage of such schemes and its efforts to increase take-up. It should also consider widening the eligibility criteria.”

Looking at pension saving, the committee highlighted a previous review which found there are still 12 million people in the UK who are not saving enough for their retirement. This is creating a “looming crisis”, it said.

It also highlighted growing concerns about self-employed people who have not been brought into workplace pension saving under automatic enrolment.

The committee said: “There is, therefore, an urgent need to bring the self-employed into the auto-enrolment system, but the Government has no clear strategy or timetable for doing so.