LISAs were launched in 2017 under the then-Conservative government.
Since then, 6% of eligible adults have opened one, with about 1.3 million accounts still open, according to the most recent figures.
MPs on the Treasury Committee have been gathering evidence on whether the product is still fit for purpose.
In a new report, the committee said the LISA’s dual purpose to help people save for both the short- and long-term “makes it more likely consumers will choose unsuitable investment strategies”.
“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,” the report said.
It noted a surge in withdrawal charges, with almost double the number of people making an unauthorised withdrawal (99,650) compared to those who used their LISA to buy a home (56,900) in 2023-24.
The committee said this should be considered a possible indication that the product was not working as intended.
First-time buyers can use a LISA to purchase a home up to the value of £450,000, and there have been calls by some to raise this threshold as it has not changed since 2017, while house prices have risen.
Some of the unauthorised withdrawal charges may have been for people who used the money to buy a home worth more than £450,000.
The committee also described the rules which penalise benefit claimants as “nonsensical”.
Currently any savings held in a LISA can affect eligibility for universal credit or housing benefit, whereas this is not the case for other personal or workplace pension schemes.
If that is not changed, the committee said the LISA should be “clearly labelled as an inferior product” to those who may be eligible for such benefits.
