It’s launching 2 months today but the Lifetime Isa is being spurned by large swathes of the financial sector – and possibly many of the young people it’s supposed to help
It is supposed to be the answer to millennials’ financial prayers – a tax-free savings vehicle offering you free money towards your first home and eventual retirement. But there are signs that the Lifetime Isa is yet to win over apathetic savers and a hostile financial sector just two months until it launches.
The Lifetime Isa was unveiled by former chancellor George Osborne in what would turn out to be his last Budget in March 2016. It allows anyone under the age of 40 to squirrel away up to £4000 a year, with the government adding 25 per cent on top. The LISA can be invested in the stock market or saved into cash, with all interest or returns free from tax. Should you use the product from 18 to 50 (the maximum age allowed once you start saving) you could theoretically earn bonuses of up to £32,000.
The government will press ahead with launching the LISA at the start of the next tax year on 6 April, despite the policy drawing sharp criticism from the financial industry. A number of companies and organisations have complained to the Financial Conduct Authority about the potential costs involved with investing in the LISA, particularly if people close the product before they have bought a home or have reached the product’s maturity age of 50, as well as its potential to undermine pensions.
Such complexities might help to explain why the LISA hasn’t yet registered with its core demographic – hard-pressed young savers. The majority, 69 per cent, of the public don’t understand what the LISA is or haven’t even heard of it, according to new research conducted by Aegon. Even when told how the new product will work, less than half of respondents say they will take one out, with a third suggesting they will use it for a house deposit and a quarter interested in using it to save for retirement.
Aegon, which provides personal and workplace pensions, said the LISA was “very unlikely” to be the most efficient way for employees to save specifically for retirement, arguing that a workplace pension had the advantage of government top ups and employer contributions.
Steven Cameron, pensions director at Aegon, said: “Education and information is key, particularly as not everyone will seek financial advice when starting saving. One of the major concerns we’ve had from day one is that younger workers will opt out of their workplace pension, forego valuable employer contributions, and instead save into the LISA. There is a real risk of LISA undermining the Government’s successful automatic enrolment initiative.”
Tom Selby, senior analyst at investment platform AJ Bell, said: “Clearly savers who opt-out of auto-enrolment and instead save into a Lifetime ISA will be missing out on the valuable employer contribution. This will not be in their best interests in the vast majority of circumstances, so providers will rightly be required by the regulator to plaster health warnings on the product explaining this and the implications of the early exit penalty.”
The Tax Incentivised Savings Association has implored the regulator to drop an “unfair” five per cent early withdrawal charge on the LISA and has also expressed alarm that the LISA will deviate from new regulations designed to make the costs of investing clearer. The Financial Conduct Authority is set to publish detailed guidelines on how the LISA should be sold next month, having closed its consultation in January. It has already warned that firms selling the LISA must provide extensive risk warnings, remind customers of the early withdrawal charge and offer a 30 day cooling off period. The government has scrapped exit charges for the first year of the product but has stopped short of insisting that savers must take professional financial advice before buying a LISA.
The LISA does have its fans, including DIY investing giant Hargreaves Lansdown. It is one of only two investment platforms (the other being the Share Centre) that will provide the LISA when it launches this year. Danny Cox, chartered financial planner at Hargreaves Lansdown, said the LISA was a better product for home saving than the existing Help to Buy Isa on account of its higher contribution levels, the government bonus and the fact that you can invest in a stocks and shares version to ramp up returns.
Others have pointed out that the LISA will help young people save for their first home far quicker than if they had used a standard high street deposit account – giving them more time to build up a pension pot. For instance, a 25 year old earning £26,500, with an annual salary increase of 2.5 per cent, would take eight years to save a deposit worth £20,000 if they used a LISA (saving £2000 a year and earning 0.5 per cent interest). This is 2 years less than if they stashed away the same amount in a savings account paying the same interest. The amount that would have gone into a home deposit for another two years could be saved into a workplace pension instead, giving them an extra £5,281, according to the financial advisory firm WEALTH at work. Saving at this rate until the age of 60 would give you an estimated pension pot of £433,265 – nearly £20,000 more than if you had only used a savings account initially. However, you would need also need to be saving into a workplace pension scheme with contributions worth 9 per cent over that period (generating investment returns of 5 per cent) to get the full benefit.
Jonathan Watts-Lay, Director of WEALTH at work, said: “There has been some concern that LISAs will stop young people from saving into their pension. However, I doubt if many people are currently saving into a pension at the expense of saving for a deposit on their first home.
“We hope that our calculations, whilst obviously simplified to demonstrate the point, show that saving into a LISA can actually help young people to save for a deposit faster than using a savings account and that by getting them into the savings habit, it may also actually increase their pension pot.”
Published in the Herald on 4th February 2016. To get in touch with the Young Money Blog, use the Contact page or email ionabain31[at]gmail.com.