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Has the Lifetime Isa failed to take off?

The Lifetime Isa has launched with little fanfare amid criticism the product will only serve the wealthy and disappointment at the lack of initial appetite among providers.

The Lifetime Isa went live on 6 April, with those between 18 and 40 able to pay in up to £4,000 each tax year, with contributions qualifying for a 25 per cent Government bonus towards their first home or retirement.

Hargreaves Lansdown, The Share Centre and Nutmeg are the only direct-to-consumer investment firms offering the product at the time of writing, with only a handful of other providers planning launches for later this year.

Despite the initial hype, experts remain sceptical on the uptake of the scheme, and argue providers are wrongly considering it as a short-term investment product. They also warn on potential regulatory issues with providers promoting the scheme to unsuitable clients.

Money Marketing has examined the first available data on Lifetime Isa applications to show what the current business mix looks like and how this could shape up in the future.

The early results

Since the launch of the Lifetime Isa,  providers have seen requests come from new clients but have also seen a mix of transfers from their own and other providers’ Isas, especially from Help to Buy schemes.

As of 9 April, The Share Centre said it had opened “several hundred” Lifetime Isa accounts.

The majority of Lifetime Isa customers were new to the firm, with a small proportion transferring monies from existing accounts with the company. No transfers came from other providers.

For Hargreaves Lansdown, which has a 40 per cent market share in online investing, the picture is different. It opened 3,349 accounts in the first 24 hours from launch.

Hargreaves processed a large number of requests and questions about transferring out of Help to Buy Isas from other providers and into the new Lifetime Isa.

A smaller percentage of accounts came from existing clients within other Isas offered by Hargreaves or clients using other services at the firm.

Hargreaves notes 868,000 Help to Buy Isa accounts have been opened since 1 December 2015, showing it was a popular choice for people wanting to climb the property ladder.

Switching to a Lifetime Isa from Help to Buy is advocated by some due to higher contribution limits, earlier bonus payments and the investment opportunities.

But not all providers are able to offer the switch to the Lifetime Isa from other products.

Nutmeg, which saw 1,217 accounts opened on 6 April, says it is still working on “some of the functionality” of the Lifetime Isa and cannot yet accept Help to Buy transfers.

Chief executive Martin Stead says while the importance of employer contributions should not be forgotten, he argues the 25 per cent bonus towards a house offers a reward “unlike any other”, and argues the Lifetime Isa is “flexible in a way that pensions are not.”

The short-term view

Experts say providers should not see the Lifetime Isa as a short-term investment option and expect fewer existing Isa investors to apply for it in the future.

Royal London director of policy Steve Webb says the unintended consequence of the Lifetime Isa might be that it helps wealthier individuals boost their children’s savings.

He says: “What is clear is it feels like a product to be used for the children of the wealthy. This is particularly true given the clampdown on the amount of money that parents can put in their pensions.

“This is not a scheme about helping the struggling renters, it is a tax break for families who already have wealth.”

Wingate Financial Planning director Alistair Cunningham argues it would be misguided for providers to think the Lifetime Isa is just for first-time buyers and says money flocking into the product will come from regular savings, now to be invested in the stockmarket.

He says: “There’s a perception the Lifetime Isa is going to be a short-term investment vehicle and I am not sure it is going to be the case.

“The Share Centre and Nutmeg offerings are particularly inflexible and they are all in investments. This is where it becomes a more prevalent area for the Lifetime Isa and where they can make their money. It will be investment-linked money.”

Architas investment director Adrian Lowcock says the initial hype of the Lifetime Isa can be justified by the perceived simplicity of its rules compared with pension products.

He says: “There’s always going to be an initial bump when launching a new product and in this case with the Lifetime Isa it has the appeal from the first-time homebuyers, but you’ll see less money coming from existing clients. Not everyone is active on day one.”

Supply vs demand

Webb says the appetite for young people to invest in cash creates a conflict as providers are selling more Lifetime Isas with stock and shares options.

He says: “My understanding is the Lifetime Isas opened so far are stocks and shares-based, not cash. From the current Isa system young people are even more likely to have cash Isas than older people so there’s an interesting mismatch here.”

There is also a potential regulatory issue if providers will tend to switch to new Isas for non-sophisticated clients.

“It has the appeal from first-time buyers but you will see less money from existing clients. Not everyone is active on day one.” 

Webb says: “If providers encourage people who may not be sophisticated to take that cash Lifetime Isa, perhaps opting out of a pension process, the FCA is going to start wondering if that is the wrong product for them.”

Among a number of other providers, AJ Bell says it will look to offer Lifetime Isas in June across both its adviser platform and direct.

The firm expects demand to come from Help to Buy transfers and existing Isa funds as well as new clients.

An AJ Bell spokesman says: “The benefits of pension tax relief and employer contributions to workplace pensions should not be forgotten and providers will rightly have to provide warnings around the risks opting out of your workplace scheme in favour of a Lifetime Isa.”

‘A slow build’

But commentators are disappointed at the lack of providers offering the Lifetime Isa, especially in the advised platform space. Transact, which is the only advised platform offering the Lifetime Isa so far, received just 16 applications on 6 April.

A Transact spokesman says: “We see the Lifetime Isa as part of our service proposition, enabling advisers to fulfill thorough financial planning for their clients and their families.

“We have had lots of inquiries from advisers who will discuss with their clients as appropriate. We certainly don’t expect a big rush of new Lifetime Isas – it will be a slow build.”

Cunningham says it is “very disappointing” to see only a few entrants to the Lifetime Isa market and even more disappointing there are so few advised options.

But Webb notes the Treasury has been surprisingly quiet in promoting the Lifetime Isa at launch, suggesting this could be “a sign of failure”.

He says: “Providers are not releasing great numbers, and although it is early days take-up might not been that great, so the Treasury might be seeking to distance itself from the launch of Lifetime Isas.”

Expert view
Keeping it in the family

Advisers are switching on to intergenerational wealth planning as parents and grandparents feel ever-increasing pressure to share the baby boomer wealth. So the introduction of the Lifetime Isa could be significant for advisers who are serious about family financial planning.

Transact is the only adviser platform to offer the Lifetime Isa from 6 April. The platform makes it cost-effective to hold a Lifetime Isa because it facilitates the family linking of accounts. The average Transact account is a portfolio of around £188,000 and the Lifetime Isa maximum annual allowance and maximum bonus equates to £5,000 each tax year. So in the first year, the platform charge on a family-linked portfolio of £193,000 in an Isa wrapper would be 0.30 per cent.

If the adviser opened an individual Lifetime Isa account on Transact, the annual charge on £5,000 would be 0.5 per cent on the assets and a £12 Lifetime wrapper charge, which equates to 0.74 per cent. So in a family-linking scenario, which Transact expects to happen in virtually every instance, the Lifetime Isa holder pays an annual platform charge of £15 rather than £37.

The lack of availability on direct platforms and through banks is disappointing. But is it that odd that we have not seen a flurry of adviser platforms making the Lifetime Isa available? After all, the average advised client is not under 40 and saving for their first home.

Lack of clarity over the final rules until very late has not helped adviser platforms to launch (or anyone else for that matter). Gaining regulatory approval has also been a protracted process: we are told six months is the minimum length of time.

This product is not going to drive significant flows to platforms but for advisers serious about holistic family planning, it should be an important product in the financial planning arsenal. Many believe the biggest demand for the Lifetime Isa will be from wealthy parents opening accounts for children. For
adviser platforms, why have that cash go to a D2C platform when you can keep it in the family?

Miranda Seath is senior analyst at Platforum

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Comments

There are 15 comments at the moment, we would love to hear your opinion too.

  1. The Lisa is also a great product for self-employed people’s retirement planning if they are self-employed and basic rate taxpayers. They effectively get the same tax relief as on pension contributions, but the proceeds after age 60 are tax free, not three-quarters taxable. That’s a potentially big mass market, and reasonably sticky.

    • Most self employed people do tend to be self employed.

    • Yes and it isn’t completely locked away until 55 unlike pensions, so it can be fallen back on in an emergency with simply the tax (25%) applied as if it had never been in the LISA in the first place.
      What’s not to like for the self employed who aren’t auto enrolled and get no employer contribution to give up by opting out…… no brainer really….

      • Unfortunately the government take back 25% of the total, including their contribution – meaning you effectively lose 6.25% on your original investment. So it is quite a harsh penalty, to be avoided.

  2. The industry should be welcoming the Lifetime ISA with huge enthusiasm as it is one of the few (possibly the only?) genuinely additive products to be introduced in the last 20 years. Yes people might invest in it instead of a pension, yes wealthy parents will obviously use it for their kids instead of something less tax efficient, and yes it could have been slightly less complex……..but it is very definitely a good way to save, is much easier to comprehend than a pension and could well be the product that starts to make people save more and understand the benefit of doing so. Senior industry figures putting a negative spin on it (often just stating the obvious in the process) does nothing for the industry.

  3. “After all, the average advised client is not under 40 and saving for their first home.” This sums up the situation. I only have two <40 clients, both of whom are higher rate tax payers and already comfortably on the housing ladder.

    Danby makes an excellent point but I can't see how the financial planning community can embrace these products in the current format. Unless providers can come up with a hybrid solution that seamlessly diverts contributions to an alternative tax wrapper once the contribution or age limits have been reached, I need to produce two separate advice trails, with separate research, disclosure, recommendations, etc., for each one, which makes the cost of the advice prohibitive.

    This problem would be relieved if the contribution or age limits were higher, but they would arguably be more attractive than pensions and therefore prohibitively expensive for the Treasury.

  4. @Roger Sole spot on

  5. The under 40s generally are struggling with rent and mortgages. Maybe younger people can use before they buy their first home when hopefully they are saving with their parent’s backing!

  6. It’s early days yet. I am not surprised that Transact had so few applications on 6th April, in fact I am surprised they had any as the forms weren’t available on-line until 6th (as I was wathcing for the launch announcement)
    I have VERY few clients udner 40, but I have a lot of clients with children and grandchildren under 40 and over 8 and for many of them, it will be the influence of my clients on their children/grandchildren, which will result in these being opened in the net few months, but this takes time when we couldn’t really push something which didn’t exist until a few days ago!
    LISAs will be a “buy”, they will not be sold or advised on. The word needs to get out there, but it will be a slow burn as there is no marketing allowance for them and no money in them for the providers (even less than with the failed stakeholder systems), they are however the future and if you don’t embrace them for the younger generation, you risk having no younger clients for your succession planning, hence why HL, Transact, Nutmeg and The Share Centre are the forward thinking firms on this.

    • over 18…. my normal multiple mistypes and spelling mistakes… whoops.

    • If HL, Nutmeg and The Share centre gave intermediaries on-line access alongside the consumer, then many of us would quite happily recommend them for the right consumer, the problem is most of them want to control distribution and think that “advice” can be robo and delivered by a computer when it can’t, guidance can be and should be, but NOT full advice. For £4k per annum however, an individual rarely needs regulated advice and a robo guided service should be able to sort asset allocation and there would be little to choose between any of the providers already offering LISA at present except convenience to the consumer and adviser.

  7. Hi
    I’m 22 years old currently living with parents, attempting to gather a deposit for my first home. Until now I’ve been putting £200 per month into a help to buy ISA, which I’m now aware cannot be used for the initial deposit on a first home, at least not with the 25% government top up. Is the LISA a more viable option for me, particularly with the maximum deposit per year being £4000 rather than £2400. Thanks

  8. robert milligan 28th April 2017 at 3:32 pm

    As I have said so many times before,,, what’s Good/Best for the client is not always good for the Product Providers, in this case the Providers can see no profit in it for them so “Phoo Phooed” it as they say in Black Adder

  9. Its a ‘kiwi’ product and will never take off,complicated, narrow use and penalty ridden.

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