We, the undersigned, call upon the UK government to take immediate action to exclude Lifetime ISA (LISA) savings from the Universal Credit (UC) savings allowance.

The LISA was created as a vital tool to help individuals save for either their first home or retirement, both of which are essential for building financial stability and improving long-term life prospects. However, the inclusion of LISA savings within the UC savings allowance creates an unintended penalty for those who are already economically vulnerable and discourages claimants from using this important scheme to secure their future.

Currently, Universal Credit savings rules reduce benefit entitlements when a claimant’s savings exceed £6,000, with eligibility cut off entirely at £16,000. By including LISA savings within these limits, the system creates a barrier to financial planning for low-income individuals, forcing them to choose between accessing essential benefits in the short term or saving for long-term security.

This policy disproportionately disadvantages UC claimants who are attempting to better their circumstances through responsible financial planning. Instead of incentivising savings, it traps individuals in a cycle of short-term thinking, hindering their ability to secure stable housing or plan for retirement.

We believe that excluding LISA savings from the UC savings allowance would:

Support Long-Term Financial Stability: Encouraging savings through LISAs would help claimants build a more secure financial future, reducing their reliance on benefits over time.
Promote Home Ownership: Many claimants rely on LISAs as a pathway to owning a home, breaking the cycle of reliance on rental housing and reducing long-term housing insecurity.
Foster Equality and Opportunity: Allowing LISA savings to grow without impacting UC entitlement would create fairer opportunities for low-income individuals to achieve key milestones such as home ownership or retirement readiness.

We urge the government to address this issue by amending Universal Credit regulations to exclude LISA savings from the savings threshold. This change would empower individuals to save for their future without fear of losing the safety net they rely on today.

While we acknowledge that the LISA allows for withdrawals, which could potentially be used for purposes other than buying a first home or retirement, we believe this issue can be addressed in a way that is both fair and practical, without penalizing UC claimants who use the scheme appropriately.

Quarterly Reporting of LISA Withdrawals:
Claimants could be required to report their LISA balances and any withdrawals every quarter. This ensures regular monitoring and transparency, allowing UC to properly assess whether any withdrawals have been made for non-permissible purposes. If funds are withdrawn for purposes other than home purchase or retirement, those amounts would be counted toward the UC savings threshold at the time of the report. This quarterly check balances the flexibility of saving for the future with the need to ensure that the system isn’t abused.

Grace Period for non-qualifying withdrawals
A grace period of 12 weeks could be introduced for claimants who make withdrawals from their Lifetime ISA (LISA) for non-qualifying purposes. During this period, they would have the opportunity to pay back the withdrawn amount, ensuring it doesn’t count towards the Universal Credit (UC) savings threshold. If the funds are repaid within the 12-week period, they would remain excluded from the UC calculation. However, if the funds are not repaid within this time frame, the amount withdrawn would count toward the claimant’s total savings. 
Partial Repayment: If the claimant withdraws £1000 but pays £500 within the grace period, only £500 would be excluded from the savings calculation, and the remaining £500 would count towards the UC savings threshold.

Threshold for LISA Withdrawals and Monitoring of Withdrawal Patterns:
To prevent the abuse of the system, a cap could be introduced on the total amount a claimant can withdraw from their LISA for non-qualifying purposes. For example, withdrawals for non-qualifying purposes could be capped at £2,000 per year. Once the claimant exceeds this cap, any further withdrawals would count toward their UC savings threshold.

Additionally, if claimants regularly make small withdrawals, such as monthly or quarterly withdrawals that are just below the cap, the system could flag these patterns for review. This would help identify those attempting to use the LISA for general savings, rather than its intended purpose of buying a home or retirement. If no legitimate reason is provided for the withdrawal, the amount would then be included in the UC savings calculation.

Tiered Penalty System for Abuse:
For cases where someone is clearly abusing the system, such as making repeated small withdrawals, a tiered penalty system could be introduced:

First offence: A warning for abusing the scheme
Second offence: A partial penalty, where part of the withdrawn amount is excluded from the UC savings threshold.
Repeated offences: Full penalty, where all funds withdrawn for non-qualifying purposes are included in the savings threshold.

Consequences of inaction
If the government does not act to exclude LISA savings from the Universal Credit (UC) savings threshold, it risks not only undermining individuals' financial security but also missing an important long-term benefit to the welfare system itself. By encouraging savings for home ownership and retirement, excluding LISA savings would ultimately reduce the need for long-term reliance on benefits.

Also, inaction would unfairly penalise individuals who are carers for vulnerable people, such as those with disabilities, elderly relatives, or young children. Many carers are unable to commit to full-time work due to the demanding nature of their caregiving responsibilities, and as a result, they may face financial hardship. For these carers, the ability to save for their future through schemes like the Lifetime ISA (LISA) is crucial, as they often have limited opportunities to save due to lower or fluctuating income levels. However, the inclusion of LISA savings in the UC savings calculation means that carers who are trying to secure their future, whether through home ownership or retirement savings, could be penalised and lose vital benefits, which they may would struggle greater without due to inability to work regularly.

This policy disproportionately affects those who are already providing invaluable care to society’s most vulnerable, and it discourages them from taking steps to improve their financial future. Caregivers are often at a higher risk of financial instability, as they may not be able to contribute as much to their savings due to time and income constraints. Penalising them for saving within the LISA scheme not only hinders their ability to plan for their own security but also adds an extra layer of stress for people already in financially vulnerable situations.

Excluding LISA savings from the UC savings threshold would therefore be especially important for carers, enabling them to save for a better future without losing their access to essential support. This would recognise their contribution to society and help ensure they are not further disadvantaged when it comes to building long-term financial stability.

Long-Term Benefit: Reduced Reliance on Housing Benefits
One of the key advantages of excluding LISA savings from the UC savings calculation is that it could facilitate the eventual purchase of a home. When individuals are able to buy a home using their LISA savings, they will no longer be eligible for welfare system support to cover their housing costs, as mortgage payments aren’t covered. Universal Credit does not cover mortgage costs for homeowners, so the more individuals who can transition into home ownership, the fewer people that will need ongoing assistance for housing.

This means that by allowing individuals to save for a home without being penalised by the savings threshold , the government would be investing in long-term financial independence for UC claimants. Rather than continuing to draw on the taxpayers to cover housing costs, these individuals would be paying their own mortgage, freeing up funds that could be directed toward other areas of need within the social safety net.

Redirecting Savings to Other Welfare Needs
By enabling individuals to accumulate LISA savings without fear of losing UC benefits, the government could see a reduction in overall demand for housing support in the future. This would create an opportunity to redirect those resources into other vital areas, such as healthcare, education, or support for those in the most acute need. It would also encourage individuals to plan for their future, ultimately reducing their long-term dependency on state support.

In the long run, promoting home ownership through the LISA would alleviate pressure on the welfare system, contributing to a more sustainable and effective use of public funds, while also fostering greater financial stability and independence for individuals.

By making these changes, the government would demonstrate its commitment to supporting responsible financial planning, improving life chances for all citizens, and ensuring that vulnerable people are not penalised for saving for their future.

We ask for your support in making this change for the betterment of all UC claimants.