There is something strangely compelling about the Treasury’s increasingly desperate attempts to strong-arm financial institutions into launching Lifetime Isas – a product almost no one understands or seems interested in.
According to Money Marketing, hapless Treasury officials are on the blower virtually every week to find out when banks are planning to launch one of former chancellor George Osborne’s flagship consumer finance products. So far, the industry is having none of it; although I suspect that may change over time.
There is nothing new in either the Government tinkering endlessly with new variants of products it wants to see in the market, or of the financial services industry deciding to stay well clear – despite entreaties and not-so-subtle arm-twisting.
Assembling the industry
Back in the early Noughties, a similar scenario emerged when ministers decided to encourage Catmarked products, more transparent and lower-charging mortgages, pensions, savings accounts and Isas.
Aside from pensions, where lower charges are now mostly embedded in the product DNA compared with a decade ago, the industry boycotted attempts to engineer similar outcomes elsewhere.
Of course, in some cases, there were justifiable reasons for this non-participation. On mortgages, for example, it was possible to show many of the products then being launched were of better value than those being pushed by the Treasury.
In other cases, it was more to do with institutions being unwilling to give up any slice of their profits to help consumers get a better deal.
The difference – from the Government side at least – is that, whereas back then, the primary intention was to bring some order to a Wild West scenario of ludicrously opaque charging structures, the purpose of the tinkering this time is to meet a narrowly-defined need, mostly among presumed homebuyers.
Let’s make no bones about it, Lifetime Isas are a weird product. First, there is the age cut-off: you have to be aged under 40 to start saving into one. So if the purpose of doing so was to start a pension, something that particularly interests those over 40, forget it. In any event, why would anyone want to save for their retirement in an Isa when the benefits of doing so in a pension first are currently so much more compelling?
Then there is the amount you can save. £4,000 sounds like a huge amount of money. And indeed it is. Except that if you are using the money to buy a house, the size of the deposit nowadays is such that any amount you save is dwarfed by increases in property prices, even with the Government’s 25 per cent bonus on the amount you have saved.
And what about the withdrawal charge? Unless you have reached the age of 60, are terminally ill or are buying the property whose stratospheric prices increases have outstripped both the Government’s bonus and any growth in the value of your Lifetime Isa, the Government will penalise you 25 per cent.
However, this is not only applied to the money you have set aside – in effect the Treasury reclaiming what it gave you in the first place – but on the full value of the investment, including both the bonus and any growth in the underlying fund.
In other words, you will be taxed if you try to take cash out of a tax-free product in the event of any personal or family emergency other than your imminent death.
“Let’s make no bones about it, Lifetime Isas are a weird product.”
The only exception is in the current tax year – and even then only because the Government has backed away from the consequence of a farcical and unforeseen situation where there was a risk of people being penalised 25 per cent for making withdrawals on their Lifetime Isa before they even received their bonus, which will be paid on one lump in 12 months’ time.
Last on the list
It is becoming clear the Lifetime Isa is not a product with any fundamental existential purpose other than to plug a perceived hole with something that is not particularly well thought-out.
Based on this fairly self-evident assessment, it would be easy to assume Osborne’s replacement, Philip Hammond, might be tempted to ditch it as a product, or at least to let it wither in the vine.
My guess is that will not happen, though. Lifetime Isas will be seized on by a minority for whom it will provide an additional means of sheltering money in a tax-free environment.
It will be last on the list of advisers’ product recommendations (a bit like Tessas and single company Peps were) but it will probably be taken out in a few hundred thousand units a year; enough to make the Government claim it was a great success after all.
The irony is that the idea of a Government cash bonus on savings is a good one. But if you are going to impose an exit charge, the challenge is how to make it as fair as possible by focusing on the bonus only, while making the bonus itself so generous no one wanted to cash in other than in an emergency.
The Lifetime Isa will be seen as a costly missed opportunity to address a genuine savings gap affecting people who currently cannot afford to save, let along buy a house. Shame.
Nic Cicutti can be contacted at firstname.lastname@example.org