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Ros Altmann: Without advice Lifetime Isa savers face clear risks

Ros AltmannSince it was first proposed, it has been clear to many that the Lifetime Isa is unsafe to sell without advice. Significant dangers arise from the product’s complex design, absence of clear risk warnings, lack of suitability checks and asymmetry of information between customers and providers. The first evidence of such problems is appearing.

Lisas aim to replace Help to Buy Isas but have confusing rules. People aged 18 to 40 can save up to £4,000 a year, on which they receive a 25 per cent government bonus. Lisas can only be used on a first property purchase or must be held until age 60 to be withdrawn tax-free for retirement.

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Apart from conflating saving for a deposit with long-term investment for retirement, if customers need to take funds out sooner for other purposes, they face a draconian 25 per cent penalty charge. Most think the penalty merely recovers the 25 per cent government bonus. But it is far worse than that.

I recently met a young couple seeking compensation for their Lisa losses. They saved for two years, accumulating just enough for a deposit on their dream home, a £475,000 two-bedroom London flat. They saved £8,000, plus the £2,000 government bonus, and were relying on this to afford the deposit. But they were unaware of the £450,000 limit. They were desperate not to lose the property and needed their money back.

They found the 25 per cent penalty did not just recoup the £2,000 government bonus. They were also being charged £500 just to get their own money back. With only £7,500, they could not raise the £500 and lost the purchase.

They were shocked a government-sanctioned product to help people buy their first home had small print that could cost them so much. An adviser would have explained the risks of a property in that price range. Of course, the cost of advice must also be factored in, but leaving people on their own is not appropriate.

There are further risks for people using Lisas for retirement saving instead of pensions.

Ros Altmann: Net pay injustice must end now

The 25 per cent bonus is exactly equivalent to 20 per cent basic rate pensions tax relief, but higher rate taxpayers will be worse off, as will workers giving up employer contributions or National Insurance relief from salary sacrifice. There are also investment risks. Many Lisas only offer cash savings, but holding cash instead of diversified long-term growth assets will normally leave people poorer in retirement.

Behavioural features also make Lisas less suitable than pensions. While auto-enrolment takes advantage of inertia and pensions incentivise keeping money for later in life, Lisas incentivise withdrawing funds at around the age of 60.

Some clients will benefit from Lisas, with extra taxpayer top-ups for wealthy under-40s who have filled their annual or lifetime allowances, or non-earners whose relatives have already put the maximum £3,600 into a pension for them. But is this the best use of Lisa reliefs costing £1bn?

Most providers have steered clear of Lisas and the Treasury select committee last July recommended they be abolished. I support its view.

Ros Altmann is former pensions minister

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Michael Johnson 19th March 2019 at 4:29 pm

    The 25% “withdrawal penalty” is clearly daft, and should be 20%, as I originally proposed to the Treasury. Pre-60 withdrawals would then be economically neutral for saver and Treasury.

    In addition, the LISA should be incorporated within the automatic enrolment framework, eligible for employee contributions made within AE, with employer coutributions + bonus going into a Workplace ISA, locked in until 60.

  2. Whilst I get that the rules are perhaps a little complex, your example is a little weak. If the loss of £500 was the limit which meant they lost the property then they should be relieved at a lucky escape. A £475,000 flat lost for lack of £500. They would have been repossessed the first time the fridge broke.

  3. I agree with both MJ and JS as stated above. Lisa is a good product with a couple of flaws. Fix the flaws, don’t throw the baby out with the bathwater.

  4. When you can take out a credit card or borrow money in less than 30 mins and for zero upfront cost. But getting advice on saving will take the adviser many hours of work and likely cost you £1,000 or more, the reason why adviser stay away from LISA’s and people with little money is quite obvious to all but the politicians.

    However “financial advisers” don’t have the lobby power of the banks and lenders, so it’s likely that the high risk activity will continue, whilst those that want to be prudent will be penalised and forced to get advice that’s very expensive because of stupidly excessive regulation.

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