Lifetime ISAs may be diverting people away from more suitable products and putting part of their savings at risk, MPs have warned.

According to a new report by the Treasury Select Committee published today, the LISA’s objectives to help people save for both the short and long term makes it more likely consumers will choose unsuitable investment strategies.

The report said cash LISAs may suit those saving for a first home but may not achieve the best outcome for those using it as a retirement savings product, as they are unable to invest in higher-risk but potentially higher-return products such as bonds and equities.

Committee MPs described rules which penalise benefit claimants as ‘nonsensical’ and concluded that it is possible that LISAs have been mis-sold to people who are eligible for Universal Credit or Housing Benefit now or in the future.

That’s because under the current system, any savings held in a LISA can affect eligibility for Universal Credit or Housing Benefit despite that not being the case for other personal or workplace pension schemes.

The Committee said that if that is not changed the LISA should be clearly labelled as an inferior product to those who may at any point in their life be eligible for such benefits.

The Committee also criticised the 25% charge for withdrawing funds due to unforeseen circumstances. The charge means that, as well as losing their bonus, LISA holders who need to make an unplanned withdrawal face losing 6.25% of their own savings. As a result, customers can be left with less money than they originally deposited.

Dame Meg Hillier, chair of the Treasury Select Committee, said: “We know that the Government is looking at ISA reform imminently which means this is the perfect time to assess if this is the best way to help the people who need it.

“The Lifetime ISA needs to be reformed before it can genuinely be described as a market-leading savings product for both prospective homebuyers and those who want to start saving for their retirement at a young age.”

Former Chancellor George Osborne introduced the LISA in the 2016 Budget, aiming to provide an alternative method of tax-free saving for retirement while simultaneously encouraging people under 40 to save for a property by offering incentives which could help people get on to the property ladder.