The Lifetime Isa is one of the biggest financial developments in…well, our lifetime. No exaggeration – what other product is being held up as a way to get on the housing ladder AND save for your retirement? But it’s not a risk-free play. In this article for Prospect Magazine, I analyse how the policy has come about, why it hasn’t been supported by the financial sector and the risks it poses for young people…
It is still Britain’s foremost means of saving for retirement. But is the mighty pension facing its biggest crisis yet? That’s the question as the Lifetime Isa launches, though not in the blaze of glory that its architects might have hoped for.
The Lifetime Isa (LISA) was unveiled in last year’s Budget by former chancellor George Osborne. Aimed at satisfying two major financial ambitions—home ownership and a prosperous retirement—the LISA provides a tax-free savings and investment shelter for both, with a generous 25 per cent government bonus. Available for all under 40s, the product caps annual contributions at £4,000, meaning that someone saving from the earliest allowed age (18) up to the product’s maturity age (60) would gain £32,000 in government cash.
However, experts believe the capacity for misselling is enormous. The LISA gives you two options—you can leave your money in cash, or invest it in stocks and shares. That leaves a huge potential to choose the wrong assets at the wrong time. Someone saving for a home should not effectively gamble their deposit in the vagaries of the stock market when they only have a short-term window. Conversely, someone saving for their retirement will find cash rates so pathetic, and cumulative inflation so damaging, that they need to be invested smartly in the stock market to have any shot at a decent nest egg.
The complexities of investing are a mystery to most young workers. Nevertheless, they could gravitate towards an investment LISA given that so far the cash version is nowhere to be seen. Potential providers are holding back on launching the product amid concerns about mis-selling claims further down the line.
The response from the investment sector has not been much better. Hargreaves Lansdown will definitely offer a stocks and shares LISA, as will the Share Centre and Nutmeg. The advantage here is that people will have a choice—and probably a greater one in due course—and can vote with their feet if they don’t like charges or investment policy. With a workplace pension, employees have little choice about where and how their money is invested, although charges have come down significantly at least.
House-buying will also remain a key goal for workers, especially when they get free cash towards it. It is likely that Help to Buy pushed up house prices and only benefited those who could buy anyway—yet it was nonetheless popular. When savings providers get their act together, who knows that the cash LISA wouldn’t generate an even bigger response? And while demand still vastly outstrips supply in the housing market, buying a solid asset in a promising area still makes financial sense.
By contrast, pensions have taken a battering in recent times. High charges, mediocre performance and a lack of transparency have left many of the older generation with very little to show for their contributions (unless they got a final salary deal). While auto-enrolment has sped up reform, problems still abound; the pot-follows-member initiative has been iced, meaning employees who move to different workplaces risk leaving tiny pension pots stranded all over the shop.
So will the LISA raise the odds of young workers leaving their workplace pension, particularly when pension contribution rates go up next year and take a bigger bite out of pay packets? Many young employees will struggle to save for both a home and retirement, even though prioritising the former over the latter is a risky bet when a continuing property boom isn’t guaranteed.
There won’t be any compulsory advice on sales of the LISA, though the regulator is plastering risk warnings all over it—including an explanation that opting out of a workplace pension would nearly always be wrong, since employees give up valuable employer contributions. Maybe the new chancellor, Philip Hammond, should fund financial advice in the workplace so employees don’t make half-cocked decisions that could leave them dependent on the state in future.
If you’re self-employed, the LISA is practically a no-brainer. As a freelance worker with no workplace pension, I will use one to be proactive with my investments and I won’t withdraw the money until retirement, since I only could at huge cost.
And here is the biggest banana skin just lying under the LISA. You can take out money before you are due to buy property or retire at 60 but you will have to pay 25 per cent of the fund in charges (except in the first year). What happens if you are coerced into accessing the fund by a forceful, cash-strapped partner? What if you’re tempted to raid the LISA when you’re in a crisis? When we fork out for an emergency plumber, we put up with the cost; we just want the hot water to come back on. LISA providers will be powerless to stop these reckless decisions—at least a pension is completely inaccessible until retirement.
In all, the LISA has lots going for it, but the government needs to rethink the advice vacuum surrounding this complicated product and the ability to leave it at huge cost. Both leave workers at risk of making rash decisions that they may live to regret.