The Great British Public has always told the Government, financial firms, and anyone else who would listen that financial products are too complicated. In response, it has naturally all become even more complicated.
Take tax-free savings. It’s now possible to choose from a cash ISA, a stocks and shares ISA, an innovative finance ISA, a Help To Buy ISA or a Lifetime ISA (LISA).
But that last one has been making headlines since it was launched on 6 April. It extends the reach of the Help To Buy account, but it’s not been without controversy.
In fact, some analysts say that, far from encouraging saving, the accounts could potentially stop people from saving efficiently for their retirement.
What’s wrong with LISA?
There are a lot of good reasons to encourage British people to save just now – figures from the Office for National Statistics show that UK household savings rates fell to record lows in 2016, while in February credit card debt reached an 11-year high, according to the Bank of England.
The Lifetime ISA will certainly be good for some. It’s only available to those aged over 18 and under 40, and it allows savers and investors to set aside up to £4,000 a year every year until they are 50, with the state topping that money up with an extra 25 per cent – that means a potential bonus of £1,000 a year.
So far, so good. Everyone likes a state top-up. However, the account has some serious limitations – account-holders can only use the cash to buy their first home or once they reach 60. Otherwise, there’s a 25 per cent charge for withdrawing cash or assets.
And that penalty isn’t just removing the state top-up. It applies to the entire account, meaning savers and investors lose a portion of their own money too.
Worryingly, given the account’s restrictions, a lot of people don’t understand them. Research from Selftrade shows that 85 per cent of respondents said they would not feel confident explaining the LISA to a friend, with half of all surveyed saying they think ISAs have become too complicated.
Steve Cattle of Explore Wealth Management thinks it’s unlikely there will be much take-up. “The other thing which is limiting the appeal of the Lifetime ISA to both the general public and the financial services industry is the complexity of it,” he adds.
“A hybrid product sitting somewhere between a regular ISA and a pension scheme, the Lifetime ISA has many rules attached to it which in my view will quite simply put people off. The administration headache of applying the rules has already dampened the appetite of providers of such plans.
“This is why, to date, there are only a handful of financial services providers marketing the Lifetime ISA, none of which are large, high-street banks such as Barclays or HSBC, which again will deter would-be investors. The high-street banks may well enter the market at a later date once consumers’ appetite for the Lifetime ISA has been established.”
But that’s not the only reason some people are down on the LISA. Others say it isn’t good value in the current climate.
Angus Dent, chief executive at peer-to-peer lending platform ArchOver, argues: “With interest rates still at rock bottom and inflation over 2 per cent pa and likely to rise, the lifetime ISA is not a smart decision for savers. Current real returns are negative and there’s no way of telling when they might increase. The base rate is likely to stay low for the foreseeable future as the UK navigates the Brexit process, and its aftermath of low sterling value is likely to drive inflation.
“This effectively cancels the old benefits of an ISA – healthy ROI in return for long-term investments.”
There’s real concern that the LISA will distract some savers who would be better off funnelling money into a formal pension scheme. Charles Calkin, a financial planner at James Hambro and Co, says: “Some older householders who qualify for a LISA and are already on the property ladder may be confused into saving into a Lifetime ISA for their pension when they would be better off contributing to a workplace pension with matched contributions from their employer.
“This is particularly true if they are a higher rate taxpayer and eligible therefore for an effective 40 per cent uplift. If you can salary sacrifice into a pension you also save the National Insurance element. For the time being at least, therefore, a pension should still be the first port of call for retirement saving for higher earners.”
The Association of British Insurers has called on the Government to monitor the impact of the LISA to make sure there are no unintended consequences.
Yvonne Braun, director of long-term savings and protection policy at the Association of British Insurers, says: “The Lifetime ISA will be a very useful savings mechanism for some people but savers should only invest in a LISA if they fully understand how they work. In particular, people should not forego their workplace pension to save for retirement in a LISA as most people will be better off saving into a workplace pension because of the employer contribution.
“It is key that the LISA does not undermine the success of auto-enrolment in workplace pensions and the ABI urges Government to monitor whether the LISA is having an impact on the auto-enrolment programme.”
Grey squirrels, red pensions
And there’s not just concern that the accounts will discourage pension savings. Some commentators have expressed concern that the Government intends these accounts to be a sort of Trojan horse for a change to the tax treatment of pensions more generally – something George Osborne consulted on.
Robin Hames, head of research at Capita Employee Benefits, says his view is that the account will mostly be used as a shorter-term savings vehicle to fund a house deposit rather than a way to fund retirement.
He says: “So the debate should really focus on how employers can help these two savings products to coexist. If not LISAs could be the grey squirrel decimating the indigenous red pension.
“For instance, employers could adopt a more pragmatic approach to employee saving: rather than making an employer pension contribution conditional upon a minimum employee contribution, employers could require employees save a minimum amount into either a LISA or the pension scheme. Clearly this might suggest some reforms of auto-enrolment minima may need to be considered along the way.
“There is a strong argument that by supporting the savings habit in this way, once the LISA has fulfilled its initial purpose, ongoing employee savings may well continue for the longer term or be redirected into pensions.”
Calkin agrees: “It would not surprise me if this turned out to be part of a long-term strategy by the Chancellor to bring an end to the pension regime and merge it with a less generous ISA regime. That might sound shrewd politically but it’s added a level of complexity to the product that will affect its take up.
“Many of Theresa May’s ‘Just About Managing’ voters who might benefit from this are likely to be put off. The people it’s likely to help most are wealthy families.”Reuse content