Personal PensionApr 27 2016

Lifetime Isa penalty exposes flawed govt thinking: Webb

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Lifetime Isa penalty exposes flawed govt thinking: Webb

Former pensions minister Steve Webb has said “fat penalties” of 5 per cent on the Lifetime Isa compare uncomfortably to recent overhauls of exit charges on workplace pensions, branding it little more than a fine on savers.

The director of policy at Royal London said exit penalties on the Lifetime Isa are at odds with government pressure on product providers to cap or scrap exit charges, which many have now done after pressure from independent governance committees.

“It sits uncomfortably alongside other statements made by the government,” Mr Webb said.

Announced at this year’s Budget, the Lifetime Isa has faced criticism for coming with a hefty exit penalty, and also over fears it could derail pension saving.

The Lisa offers a 25 per cent government bonus to help people under the age of 40 save for retirement or to buy their first home.

But for those who withdraw funds from the Isa before the age of 60 it also comes with a 5 per cent exit fee and loss of bonus, unless they are buying a house.

Mr Webb said: “It seems weird as the FCA is consulting on exit fees, has been told by government it has to set a cap on exit fees because they stop people accessing their own money and accessing pension freedoms, for the government-created product to then have a fat exit penalty.”

Some exit penalties are simply recouping costs from earlier on, he said, adding “you can argue whether too high or too low, but you can argue they are there for a reason, whereas this is just a fine basically”.

He said if the Lifetime Isa is designed to be used flexibly people should be able to recoup the penalties incurred if they are self employed by putting money back into the vehicle, but this is not possible.

Since last February, the Financial Conduct Authority put ensuring value for money in legacy pensions under the responsibility of independent governance committees, which became a mandatory requirement for all pension schemes from 6 April.

Many providers have come under the spotlight recently as some independent governance committees released inaugural reviews heavily criticising expensive exit fees and other product charges on workplace pensions.

The committees are also required to assess whether pension schemes could or should be offering the Lifetime Isa from April 2017.

Dan Farrow, director of Chelmsford-based SBN Wealth Management, said: “I’m quite comfortable with the 5 per cent charge, as the benefits still outweigh the options and this is a product that aims to stimulate longer term saving.

“As long as the 5 per cent penalty isn’t ‘enjoyed’ by the provider and the risks are set out clearly at the start, then I don’t see a problem.”

ruth.gillbe@ft.com