Key industry figures are understood to be staunchly opposing Treasury plans to allow Lifetime Isa investors early access to their savings without penalty so long as they pay the cash back.
Introduced by George Osborne at the March Budget to encourage people to save more, the Lifetime Isa has a 25 per cent government bonus and the option to withdraw cash before retirement age to use towards a house purchase.
Early withdrawal under most other circumstances triggers a 5 per cent penalty.
Speaking to FTAdviser, industry sources are in talks with HM Treasury about how the Lifetime Isa will work, with the government seeking to follow through on an idea raised in the Budget document which would allow the savings vehicle to operate in the same way as an American 401k pension.
A 401k allows consumers to borrow from the savings vehicle and pay it back over time, without incurring a similar penalty to that currently attached to the Lifetime Isa.
However Isa providers are understood to be telling the Treasury allowing cash to be pulled penalty free from the savings vehicle in a range of circumstances would leave them struggling to ensure the product is ready for the April 2017 launch date.
One source told FTAdviser: “I think there’s a real risk that if political decisions are to over-complicate the product and add multiple life events like divorce and bankruptcy or borrowing back it will build further risk for the timely launch of the product.
“The message from the industry is keep it simple. Let’s not include multiple life events.”
Allowing savers to avoid the exit fee could also potentially deliver a massive blow to pension sales - which do not allow free early access - making the new savings vehicle far more attractive.
When HM Treasury was asked if they were considering allowing the Lifetime Isa to operate along the lines of the American 401k, a spokesman said the government will explore with industry whether savers should be able to access contributions and the government bonus for different life events.
The spokesman for HM Treasury confirmed whether there should be the flexibility to borrow funds from the Lifetime Isa without incurring a charge if the borrowed funds are fully repaid was being considered.
Last month, former pensions minister Steve Webb said “fat penalties” of 5 per cent on the Lifetime Isa compared uncomfortably to exit charges on workplace pensions.
He branded the Lifetime Isa charge as little more than a fine on savers.
At that time, 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 following pressure from independent governance committees.
Earlier this month, it was revealed the vast majority of self-invested pension providers view the Lifetime Isa as a “direct attack” on the pensions industry, a survey by the Association of Member-Directed Pension Schemes (AMPS) has found.
Almost nine out of 10 of the 89 AMPS members surveyed said the new Isa would undermine pensions.
David Finan, managing director of Cumbria-based Jardine Finan Wealth Managers, said if these additional functions were to be added it was clear the government’s intention for the vehicle was for the public to switch from pensions to Isa - generating huge savings on tax relief.
Mr Finan said: “The immediate saving for the goverment is a tax relief going in. I don’t think it is the right direction.”
ruth.gillbe@ft.com
