MPs call for LISA Changes to help self-employed save for retirement and stop being penalised for withdrawls
Proposed reforms could make Lifetime ISAs more attractive for freelancers and contractors struggling with pension savings
MPs are calling for key changes to Lifetime ISAs (LISAs) that could make them far more appealing to self-employed workers, who are falling dangerously behind on retirement savings.
The Treasury Select Committee has found that only 21% of self-employed households are on track for a “moderate retirement”, compared to 36% of all households. With LISAs already proving popular among the self-employed, experts believe targeted reforms could help close this worrying gap.
How to make LISAs attractive to self-employed
Financial experts are pushing for two main reforms that would make LISAs work better for freelancers and contractors:
Lower withdrawal penalties: Currently, withdrawing money early costs you 25% of what you take out, meaning you lose some of your own money. Experts want this cut to 20%, which would only remove the government bonus rather than penalising savers.
Raise the age limit: Right now, you can only open a LISA until age 40. Removing this cap, or extending it to 55, would help the many people who become self-employed later in life.
Why LISAs work well for the self-employed
Unlike employees with workplace pensions, self-employed workers don’t get employer contributions and often worry about locking money away until age 55. LISAs offer several advantages:
- 25% government bonus (equivalent to basic rate tax relief on pensions)
- Money can be accessed in emergencies (though with penalties)
- Tax-free income in retirement
- No employer needed to set one up
Helen Morrissey from Hargreaves Lansdown explains:
Self-employed people can be hesitant to save into a pension because of their variable income and the fact they can’t access their money until at least the age of 55. The LISA just might help us close the gap.
The numbers behind LISA users
LISAs have already made a real difference since launching in 2017:
- 1.3 million accounts are currently open
- £15,000 average withdrawal for house purchases in 2023-24
- 182,500 homes bought using LISA savings since 2018-19
- Only 6% of eligible adults have ever held one, showing room for growth
LISA penalty problem
One major issue highlighted by MPs is the unfair withdrawal penalty. Over £200 million has been paid in penalties by 286,000 people over six years. In 2023-24, more people paid withdrawal penalties than used their LISA to buy a home.
Sarah Coles from Hargreaves Lansdown says:
The penalty means giving up a chunk of their own money, which is clearly unfair, penalising people for trying to do the right thing.
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What LISA changes could do for freelancers
If these changes go ahead, LISAs could become a much more attractive option for freelancers, contractors, and small business owners who struggle with traditional pension saving.
The flexibility to access money when business is slow, combined with the government bonus and tax-free retirement income, could offer the retirement planning solution many self-employed workers have been waiting for.
The government will need to weigh up the costs of these reforms, but with self-employed retirement savings in crisis, the pressure is mounting for action.