Lifetime Isa charges still ‘punitive’ despite bonus changes

HM-Treasury-700.png

Former pensions minister Ros Altmann has joined a growing number of industry voices who are critical over the way the Government plans to apply penalty charges on the Lifetime Isa.

Last week the Government published its Savings (Government Contributions) Bill which sets out in legislation how the Lifetime Isa will work in practice.

It confirms the scheme will be rolled out from April and will allow individuals aged between 18 and 40 to save up to £4,000 a year.

The Government will top up their accounts with a 25 per cent bonus, to a maximum of £1,000.

Yesterday the Treasury clarified the bonus will be paid monthly, rather than at the end of the tax year as first planned. Monthly bonus payments will come into effect from 2018/19.

As with regular Isas the money can be put into either cash accounts or stocks and shares , with savers able to pay into the product until age 50.

Withdrawals can be made to buy a first home or from age 60, or if a saver becomes terminally ill.

Withdrawals for any other purpose will attract a penalty charge.

Treasury documents published alongside the Bill state: “Account holders will be able to make withdrawals at any time for other purposes, but with a 25 per cent Government charge applied to the amount of withdrawal. This returns the Government bonus element (including any interest or growth on that bonus) to the Government with a small additional charge applied.”

Bonuses will be paid on contributions, but unauthorised withdrawals will incur a 25 per cent penalty charge on the whole fund, including any growth.

The Treasury has told Money Marketing individuals who make a loss on their investments, will still have to pay the charge if they make an unauthorised withdrawal.

Former pensions minister Ros Altmann says the exit charge is “punitive”.

She says: “As it is an Isa, savers may think it is straightforward.  I believe it could end up as another huge misselling scandal, when workers are enticed out of their company pension schemes into what looks like a tax-free savings account which they can take money back from if they need it.

“They will then realise they have lost their employer contribution, lost out on higher rate tax relief and end up having to pay big penalties if they do actually withdraw.”

Altmann has previously called for the Lifetime Isa to be scrapped, and still believes it is “a dangerous product”.

Aegon pensions director Steve Cameron says had the Treasury not moved to paying bonuses the penalty charge could have been even worse.

But he says: “While some people might think 25 per cent taken off on exit just cancels out the 25 per cent added on the way in, it goes further than that.

“In today’s low interest rate environment, you’d be lucky to get more than 1 per cent interest on a cash Isa, so the £250 additional penalty could easily wipe out five years of interest.”

AJ Bell senior analyst Tom Selby believes the penalty for those who invest in the stocks and shares Lifetime Isa could be “horrific”.

He says: “People need to be aware of what they are getting into as it is not a product that caters for changing circumstances. If savers want flexibility, it is probably not for them given the severity of the penalty.”

But Hargreaves Lansdown head of retirement policy Tom McPhail says: “I understand why the Government is doing it. What it means for investors is they will have to think quite hard in advance about what their objectives are.”

Informed Choice managing director Martin Bamford says: “Government schemes are pretty lousy when it comes to flexibility.

“The penalty could be quite harsh if savers make an ineligible withdrawal so they should only use the Lifetime Isa for what it is intended for.”