The Treasury is being urged to rethink the way it pays the Lifetime Isa Government bonus so investors do not miss out on valuable investment returns.
The Lifetime Isa, unveiled by Chancellor George Osborne in the March Budget, will allow investors under 40 to save up to £4,000 a year and receive a 25 per cent Government top-up. The products will be launched in April next year.
The Government has proposed paying the top-up on an annual basis rather than as contributions are made.
In its response to a Work and Pensions committee inquiry on the Lifetime Isa, Hargreaves Lansdown calls on policymakers to amend the rules so the top-up is paid on a monthly basis instead.
Head of retirement policy Tom McPhail says: “The Treasury should modify its policy on the Government bonus, allowing Lifetime Isa providers to claim the bonus on behalf of investors every month, rather than having to wait until after the end of the tax year.
“This will be good for the investor and over time could result in the investor having thousands of pounds more in their Lifetime Isa.”
Aegon pensions director Steven Cameron says: “The way the bonus will be added to the Lifetime Isa at the moment is not as generous as pension tax relief.
“HM Revenue & Customs might put their hands up in horror if they had to pay a bonus every time a contribution was paid into a Lifetime Isa because that wouldn’t be easy to administer.
“But under the proposed rules people will be losing out on potentially large sums of money because the bonus is added at the end, so ultimately I suspect something will have to be done.”
Savers who access their Lifetime Isa pot before age 60 for anything other than the purchase of their first home will lose the Government bonus plus any investment growth from that portion of the fund. They will also be hit with a 5 per cent exit penalty.
Hargreaves says policymakers should resist the temptation to expand the product so savers can use the money for other purposes penalty-free.
McPhail says: “The Treasury should not include any additional flexible options, such as loanbacks or other life events, which could qualify for a penalty-free withdrawal.
“This will keep the product simple and increase the likelihood of a smooth rollout of the policy next April.”
McPhail also plays down fears the launch of the Lifetime Isa will cause a spike in automatic enrolment opt-outs.
He says: “In a like-for-like comparison, a workplace pension with an employer contribution will deliver a better return than a Lifetime Isa for most people most of the time. For this reason we think opt-outs will be relatively low.”
Cameron adds: “There is no reason the Lifetime Isa can’t be compatible with auto-enrolment, provided employers can’t pay into them.
“As soon as you have two competing options, you leave an employer in a very difficult position.
“If the Lifetime Isa were to accept employer contributions it would destroy the foundations on which auto-enrolment was built and would be wholly incompatible.”
Patrick Connolly, head of communications, Chase de Vere
There are aspects of the Lifetime Isa which could be improved, such as amending the rules so top-ups are paid monthly and reducing or abolishing any exit charges. However, all investment wrappers have their restrictions and the bottom line is the Lifetime Isa will still be a very attractive product for many people.