The Financial Conduct Authority's proposed rules for the sale of Lifetime Isas will not prevent future calls for compensation, providers have warned.
In a consultation paper released yesterday (16 November), the FCA laid out a number of consumer protections for providers looking to offer a Lifetime Isa.
These rules included issuing risk warnings at the point of sale on, among other things, the penalty for withdrawing funds early.
But Richard Parkin, head of pensions policy at Fidelity International, said even with such a warning, the penalty for withdrawing funds early was confusing, and could lead customers to seek "redress" on the ground they did not understand how it works.
“There are clearly risks for firms from disgruntled investors seeking redress claiming they did not understand the penalty no matter how clearly it is presented at the point of purchase," Mr Parkin said.
"We understand government’s desire to discourage early withdrawals but we remain unconvinced that the penalty is necessary."
Mr Parkin argued that the effective penalty for early withdrawal was 6.25 per cent, not the 5 per cent often reported.
"Consider the example of an individual who invests £800 so receives a £200 government bonus," he said.
"Early withdrawal will generate a charge of 25 per cent of £1,000 leaving the individual with £750. This means a £50 loss on their original investment of £800 which is an effective penalty of 6.25 per cent."
He said it "might be better" to call it the penalty an "exit tax" to "make it clear it's government which benefits".
Steven Cameron, pension director at Aegon, agreed that the exit penalty could prove confusing, and said communication of the penalty was "key".
"The fact that both the exit charge and the bonus are set at 25 per cent could well disguise this penalty so presentation will be key to avoid failing the FCA’s ‘clear, fair and not misleading’ communication test.
“Those currently saving through a Help to Buy ISA need to understand the pros and cons of transfer funds into the LISA, including becoming subject to an exit penalty."
He said these complexities were best overcome through professional advice.
However, the FCA made no mention of the role of financial advice in the consultation paper.
james.fernyhough@ft.com
