Nic Cicutti: Lifetime Isa blunder won’t solve the savings gap

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.

Tax, exemptions

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 nic@inspiredmoney.co.uk

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. Another insightful and intelligent analysis from Mr Cicutti – thanks, Nic!

    Kind regards,
    Henry

  2. It could have been nicknamed “The Camel” as it looks like it’s been designed by a committee excluding consumers and their advisers or just based on a “consumer panel” where no conversations take place about what can be done and work.
    We’ve already recommended them to clients of children and will be opening quite a few I suspect, but I quite agree with Nic when he says “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.” Those who need something most, can’t usually save for a deposit as they are paying rent (unless living off the bank of Mum and Dad) and even if they can, they can’t save up enough deposit, but this is nothing new, it was the same problem in the 1980’s with house price growth being higher than what you could save to build a deposit in many cases if you were paying rent.
    I managed to save for 3 years from staring work to buying my first house, but only because I livid at home with my parents as did my (then) fiancee and we saved about 25% of our gross income a month if I remember rightly, didn’t smoke and rarely eat or drunk out.

  3. No argument with the main point. But if people can’t afford to save then they don’t have a saving gap, they have a reverse expenditure gap (or in plain English, they spend too much).

    If someone is not incentivised by the ability to avoid paying credit card interest rates of 20%+ per annum, or Wonga interest rates of 4,000% per annum, then no savings product you can devise will incentivise them to save. As there is no way you can offer them an incentive even higher than 20% or 4,000% without it representing an unacceptable transfer of wealth from those who don’t have any money to those that do.

  4. @Nameless. “I managed to save for 3 years from staring work to buying my first house, but only because I livid at home with my parents as did my (then) fiancee and we saved about 25% of our gross income a month if I remember rightly, didn’t smoke and rarely eat or drunk out.”

    Yep. It’s still the same formula today, although few under the age of 30 would accept that.

  5. A stupidly pointless new product, not least as we already have the Help-To-Buy ISA. Why not just allow people up to the age of 40 to withdraw (up to) a defined percentage of their Personal Pension fund to help buy their first home?

  6. I agree with all of the above, Govt is trying to find an ‘apolitical’ way of removing interest in pensions so that it can save the 40% & 45% tax relief. So much so, that as we know, they did not mention pensions at all in their ‘savings leaflet’. Hey, Treasury Guys, just make it a 25% FLAT RATE!! 25% of gross contribution equals 33% of personal contribution. “You know it makes sense” and “this time next year (in 40 years), we will be (LTA) millionaires”.

  7. Sure the product is rubbish, but the savings gap (so called) isn’t down to products, charges or advisers. The plain fact that so many commentators and government apparatchiks just will not face is that the great British public don’t want to save. We are the most personally indebted nation in the world. Credit card debt has ballooned since the start of the year.

    Currently UK personal debt stands at £1.524 TRILLION!! That equates to an average per person of £30,185 and when you consider that most of the people I know have no debts at all it rather makes the mind boggle of what the ‘average’ person’s debt really is.

    On this level of debt the annual interest works out at about £50.4 Billion which is £138 million per day. In March this year the OBR forecast that personal debt will be £2.32 Trillion by the year end – and interest rates may go up meanwhile!

    To put this in context our GDP is ‘only’ £1.8 trillion. And you shed crocodile tears wondering why people don’t save! If the Government was really serious they would reintroduce credit control. No one may buy anything on credit without a 33% cash deposit. That would concentrate minds. But then it just wont happen as our economy is firmly based on people going shopping, spending money they don’t have. Why, the bankruptcy laws have even been slackened and they are now even considering making the banks take a more lenient view on people who can’t service or repay the huge debts they have been so foolish to take out in the first place.

    • I too have advocated credit control. A minimum deposit on all purchases of 33% is perhaps a bit on the high side (the figure I have suggested is 20% or something thereabouts), but what about restricting unsecured borrowing from all sources to an aggregate maximum of three (or perhaps no more than four) times nett monthly income? Anything more is surely a recipe for financial difficulty. But, as you say, the government is unlikely to impose or even gradually phase in such restrictions because of the brake it would put on consumer spending which, of course, is what our economy is based on. Yet the present state of affairs is surely unsustainable. It’s crazy really.

  8. Spot on Nic.
    ALL IFA’s and Clients should read this and be afraid, very afraid: –

    http://www.cps.org.uk/files/reports/original/170428113923-APensionsandSavingsManifesto.pdf

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