Enthusiasm for this tax-free savings offering has been muted among advisers and their clients.
A year on from its launch, experts remain disappointed over the lack of appetite for Lifetime Isas.
In April 2017, the product hit the market with little fanfare, amid criticism it would primarily serve the children of the wealthy.
There are still only a handful of platforms that offer the Lifetime Isa, with the risk of some of them withdrawing it in the near future.
Experts have also questioned why the biggest wealth managers, such as St James’s Place or Bestinvest, are not offering the product, given the opportunity to reach younger family members of wealthy clients.
Money Marketing has examined the data on Lifetime Isa applications 12 months from the launch to see if the business mix has changed and assess the product’s prospects.
Counting up the accounts
The Lifetime Isa enables those aged between 18 and 40 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.
Despite the initial hype, only seven companies offer a stocks and shares Lifetime Isa.
Hargreaves Lansdown, The Share Centre and Nutmeg were the only direct-to-consumer investment firms that offered the product at launch, with AJ Bell following a few months later. Transact was and still is the only advised platform to offer the product to facilitate the family linking of accounts.
Investment app Moneybox and wealth manager Killik & Co joined the ranks later on in 2017.
Skipton Building Society is the only provider to offer a cash-only Lifetime Isa.
Market leader Hargreaves Lansdown says around 30,000 people had a Lifetime Isa at the broker as of this year, with the number evenly split between existing clients and new clients. As of 30 June 2017, Hargreaves had nearly half of the total Lifetime Isa accounts in the market with £36m of combined assets.
Most of the money people have invested in the Lifetime Isa is through brand new investment, although Hargreaves says it has seen a “fair number” of people transferring from a Help to Buy Isa.
Switching to a Lifetime Isa from Help to Buy is advocated by some because of higher contribution limits, earlier bonus payments and wider investment opportunities.
Hargreaves Lansdown personal finance analyst Sarah Coles says: “Interest is definitely growing in the Lifetime Isa, and as we found with the Junior Isa market, each time a new provider launches, it gets people talking about the product, and we see renewed interest in it.”
Nutmeg comes second, with more than 8,000 Lifetime Isa customers, 63 per cent of whom are male and have an average age of 33.
Over half of Nutmeg’s Lifetime Isa customers are in its fully managed portfolio range and the majority of investors are in medium-risk portfolios. Nutmeg does not offer transfers into the wrapper.
Nutmeg head of financial advice Lisa Caplan says: “Anything that encourages people to save and invest is a good thing.”
AJ Bell has more than 6,000 Lifetime Isa accounts open, with an average investment of around £2,500 so far. Sixty-six per cent of those who have opened an account are aged 30 and over.
Forty-five per cent of account holders are aged between 36 and 38 and 17 per cent are 39.
Transact has around 1,000 Lifetime Isa accounts. Eighty per cent of these were started afresh with Transact, while 20 per cent were transfers.
Transact chief development officer Jonathan Gunby says that because many advisers have entire families as their clients, the Lifetime Isa wrapper is a valid option to consider.
He says: “We are very pleased to be able to provide advisers with a wide range of wrappers to help them best meet the financial planning requirements of their clients.”
In March alone, around 50 per cent of the Lifetime Isa accounts opened at The Share Centre came from transfers either from other providers or Help to Buy accounts.
Nearly half of the investors had an adventurous portfolio. The average amount invested in a Lifetime Isa matches AJ Bell at £2,500.
The Share Centre head of marketing Paul White says the company doesn’t reveal the number of accounts opened but says “a huge proportion” of accounts opened in March have come from people transferring their accounts to the broker.
The time is right
New Government rules mean that until 5 April 2018 investors can transfer their Help to Buy Isa, including interest, to a Lifetime Isa without the amount contributing to the £4,000 annual Lifetime Isa allowance.
Investors will still be able to invest up to £4,000 in a Lifetime Isa and the whole amount will benefit from the 25 per cent Government bonus. However, if people transfer after 6 April 2018 they won’t receive the added bonus.
White says providers offering this transfer process are encouraging investors to “get their skates on”, because there’s no guarantee that the transfer will be registered by both parties before 5 April 2018.
White argues that for this reason, some providers are no longer offering the service and others are setting deadlines in the near future.
He says: “There’s no denying that opportunities like this do not come along every day, but a lack of awareness and understanding has definitely reduced the initial take -up.”
A survey conducted by The Share Centre in 2017 found that 64 per cent of investors over the age of 40 would be encouraging their children or grandchildren to open a Lifetime Isa account, and a further 30 per cent would consider doing so.
Gaps in the market
If the Lifetime Isa appeals more to the wealthiest parents, it might be surprising that many large wealth managers do not offer it.
Bestinvest says it has no plans to launch the product because of limited interest from clients, although it will keep this under review. Managing director Jason Hollands says there is little crossover with a typical wealth management client.
SJP says it does not offer a Lifetime Isa as it has a range of options available that are “more appropriate” for people getting financial advice.
An SJP spokesman says: “Planning for the long term is always a priority when guiding clients to make investment decisions and we would always advise them to take advantage of tax efficient wrappers where relevant.”
Royal London director of policy Steve Webb admits the Lifetime Isa has had less uptake than he predicted.
Webb says: “We still have a Help to Buy along with the Lifetime Isa and there is still a lot of confusion on it.
“For advisers, it is not a product that allows someone to pay for a piece of advice. Possibly the Government can expand the scope for the under-45s – they might relax the exit penalty a bit but no one is talking about it. The Government hasn’t pushed it compared to other advertising campaigns such as on Pension Wise and others.”
Architas investment director Adrian Lowcock agrees that the Lifetime Isa will remain a niche product for as long as it remains confusing to many.
He says: “If you look at all the tax benefits it looks attractive and nice on paper but the reasons why it is not going to set the world alight, unlike the Isa, you are limiting people what they can save on.
“We have auto-enrolment and company pension’s contribution so you don’t know what the real benefits are and what is better for clients. The Lifetime Isa is less flexible than another type of Isa, although it might have better tax benefits.”
However, experts are hopeful that Isas, including the latest addition to the range, will be simplified in the future.
Lowcock says: “I was always very concerned that they made it very complicated by offering many Isas and the industry seemed very excited, but that seemed a very short-term noise. It seems chancellor Philip Hammond wants to simplify these types of investments and hasn’t showed he wants to add more of them.”
Martin Bamford – Informed choice managing director
The theory is that the Government will change the rules again and the Lifetime Isa won’t be there in three years, so it will be a different product. I understand providers invest a lot of money in this so they want to wait before launching.
It is a similar case for Junior Isas, although they have got a much bigger market space and more people qualified for it.
Financial planners also tend to work with retirees so they don’t really use the product.
Aegon pensions director Steven Cameron
Of George Osborne’s Budget rabbits, the Lifetime Isa sits somewhere between the highly popular pension freedoms and the thankfully cancelled secondary annuity market.
As its first birthday approaches, while few would consider it thriving, the Lifetime Isa is arguably surviving, so for me the jury is out on whether it has “failed”. I suspect different people will judge “success” on different criteria. From a narrow perspective, success might mean widespread provider involvement and millions of savers encouraged to save for both a first home and retirement.
If this is the measure, then the Lifetime Isa is not meeting the pass mark. But from a wider review, if a significant number of those millions had gone for the Lifetime Isa at the expense of opting out of their workplace pension, and losing employer contributions, I would have seen this as a major failure.
So far, the Lifetime Isa doesn’t seem to have unwound the good work auto-enrolment is doing and it’s likely most are being used as a more generous and flexible replacement for the Help to Buy Isa, albeit with the potential for exit charges.