The plight of the Lifetime ISA
It’s fair to say that in his time as Chancellor of the Exchequer, George Osborne did his utmost to pioneer innovative schemes, policies and rule changes. Clearly, not all will go down in history as winners, and controversy was seldom far away following various Budget speeches during his six-year tenure. Yet one of his final legacies initially drew a fair degree of acclaim: the Lifetime ISA.
In what would prove to be his last address in the House of Commons as Chancellor, Osborne unveiled this new type of savings scheme, which, in essence, would offer savers a 25 per cent state-funded bonus at the end of each tax year.
The bonus will cease to apply beyond savings of £4,000 each year, but effectively means that there is up to £1,000 in ‘free money’ per year available to savers who make use of this type of ISA. The only condition of receiving the bonus is that the saver mustn’t withdraw from the account before they turn 60, unless financing a first home up to £450,000 (or the costs of a terminal illness).
As per the rules, any UK resident between the ages of 18-40 would be able to open one, and the bonus itself would be payable until the saver turns 50. That translates into a potential sweetener of up to £32,000.
It thus appears to be a no-lose product; one which consumer champion Martin Lewis has previously hailed as a ‘no brainer’ for savers, and it was all set to launch at the start of the 2017/18 financial year. Until…
A lack of detail
Earlier this week, the launch of the Lifetime ISA was thrown into doubt as the UK’s major pension firms, all claiming to be in favour of the new wrapper in principle, requested for its arrival to be postponed on account of the fact that Government, HM Treasury and regulators have provided insufficient information for them to be adequately prepared by the go-live date.
Standard Life are quoted as saying: “In addition to receiving full requirements from HMT and HMRC, we feel engagement with the Financial Conduct Authority on how the product will be regulated is essential to the successful launch of the product. At present, we do not feel there is sufficient time to properly do this and launch next April.”
This has been echoed by Aegon’s Pensions Director Steven Cameron, who stated: “We had expected to have full details by June/July, but as we still do not have these, we have put our plans on hold.”
Meanwhile, Fidelity International believe that monthly payments of the bonus are far more preferable, and have delayed their plans until such a mechanism for payment of this is in place.
“The industry is pretty unanimous that this is a more effective way of paying the bonus and there seems little merit in launching the product with annual bonuses and then having to do further work on administration systems and communication materials in 12 to 18 months’ time,” explained Richard Parkin, head of pensions at Fidelity.
A temporary delay?
If the various powers that be have indeed failed to provide such in-depth detail, then these firms are justified in their request for a deferment of the launch. However, given the recent post-Brexit cabinet reshuffle, there will be those who have doubts about when, or even if, this new savings product will ever launch. Not least because there have been detractors increasingly voicing their discontent with the Lifetime ISA itself.
Former Pensions Minister Ros Altmann, who departed government in the wake of the EU referendum result, believes that people will use this ISA as a substitute for a workplace pension, thus missing out on employer pension contributions, and potentially ending up worse off in retirement as a result.
Indeed, recent research conducted by Zurich found that nearly half of Britons eligible for this type of ISA would likely use it as a savings plan for retirement, with just 14 per cent saying they would use it to fund a first home. In addition, 15 per cent said they would raid their pot for general living expenses, while six per cent said they would use it to fund luxuries like holidays.
Is this such a bad thing?
There are some pitfalls to using the Lifetime ISA as your foremost retirement fund. As highlighted by Baroness Altmann, opting out of a workplace pension to fund this ISA means missing out on employer contributions, which also essentially amounts to pre-tax ‘free money’. Whether this is beneficial or detrimental will depend on the individual’s income and pension scheme, but it is something a portion of the population may not fully factor in.
Perhaps a bigger danger though is the relative ease of access to monies in a Lifetime ISA. With a typical workplace pension, savers aren’t able to withdraw any funds prior to the age of 55.
However, with a Lifetime ISA, account holders will be able to cash in funds at any time prior to turning 60. Yet unless they do so for the purposes of first home buying, or paying for medical expenses pertaining to a terminal illness, they will not only lose out on the entire bonus they have accumulated, but also the interest earned on this bonus, plus an additional 5 per cent charge levied against them.
Benefits and pitfalls
Unfortunately, it’s difficult to believe a significant minority of people who depend on a Lifetime ISA as their main source of income in retirement won’t fall foul to the temptation of withdrawal before the age of 60, and thus not only lose out on their bonus, but potentially be caught short financially in their golden years as a result.
Without question, the Lifetime ISA has the power to be a force for good, and bring great benefits – particularly to those of a younger disposition – at a time when savers have endured precious few rays of light. Yet as with any form of investment, we encourage both diversification, and informed decision making. With the Lifetime ISA, these two factors seem to go very much hand in hand.
So here’s hoping that, for all parties involved, the finer details of the Lifetime ISA are timeously established, transparent, and conveyed in such a way that savers en masse can fully understand the pros and cons of putting their hard-earned money into one.
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