What are the pros and cons of the Lisa?

But before they plough their savings into the shiny new product, they may want to weigh up the pros and cons.

While a simple cash Isa is generally suitable for savers of all ages and with different savings targets in mind, the Lisa is not likely to be as widely used.

Instead, its aim is to solve a rather pressing problem for the financial services industry - encouraging the younger generation to start a savings habit which they continue throughout the rest of their lives. 

There are numerous reasons why regular saving is not high on the agenda of millennials: a lack of financial education among millennials and younger, the erosion of trust in the financial services industry in general, and young people simply not having enough money to begin saving as wages stagnate and they are forced into a rental system where rents keep rising.

Closing the gap?

Danny Cox, head of communications at Hargreaves Lansdown, explains: “The savings gap has continued to widen and the financial services industry, among others, has been crying out for government incentives to encourage younger people to save.” 

He believes the Lifetime Isa represents a move to help close this gap. 

While the Lisa will not be suitable for everyone looking to save for their future, it will offer some people opportunities to save.Rachel Vahey

“From the take up of the Help-to-Buy Isa, we already know there is the appetite for incentivised schemes to be used by first-time buyers,” he says.

“On its own, the Lifetime Isa is a simple product and for those under 40s who want to get onto the property ladder it is an absolute no-brainer.”

Rachel Vahey, product technical manager at Nucleus, points to one of the most obvious advantages of the new Isa, which is its ability to help people begin saving for their first home.

She acknowledges: “While the Lisa will not be suitable for everyone looking to save for their future, it will offer some people opportunities to save.

“For example, it could be used by those who want to specifically save for a purchase of a first home (worth less than £450,000).

“They could also transfer any Help-to-Buy funds built up before 6 April 2017 into the Lisa in the 2017-18 tax year and this will not count towards either their £20,000 overall subscription limit nor the £4,000 current payment limit. So they could save an additional £4,000 on top of the Help-to-Buy funds and receive a government bonus on both amounts.”

Martin Jarvis, associate consultant at Mattioli Woods, adds the Lifetime Isa will get individuals saving for a reason because they can only withdraw their money under certain scenarios.

He notes most people understand Isas and the tax treatment savers receive from putting money into an Isa.

But he admits the government bonus element of the Lifetime Isa and being able to claim the money may be perceived as complex by some.

“It is also relatively inaccessible compared to the standard Isa,” he suggests.

Attracting criticism

Recent research by The Share Centre seems to indicate the new Isa will drill better savings habits into 18 to 39 year olds.

Of the 150 investors surveyed in the age group, 76 per cent told The Share Centre they believe the Lifetime Isa will encourage more young people to save for their future.

Meanwhile, 88 per cent named the government bonus as a reason for opening an account and 60 per cent of those polled, all of whom are currently investing, say they plan to take advantage of the new Isa product.

The Lifetime Isa has perhaps attracted more criticism than it has endorsement from those in the savings and investment industry though.

In practice I suspect that the main beneficiaries of the Lisa will be the well off, who don’t really need the extra help from the government.Paul Darlow

Why are so many concerned about a product which on the surface appears to help people onto the housing ladder or to save for their future?

At the moment, there is no clear idea of how Lifetime Isa savers will use the product.

A survey of 895 adults between the ages of 18 and 35 by the Pensions and Lifetime Savings Association reveals a split – with 42 per cent of respondents saying they will use it primarily to buy a property and 40 per cent primarily for retirement.

“My main concern about Lisas is that they risk undermining pensions as a retirement savings vehicle,” says Paul Darlow, head of proposition development at Xafinity. 

“While theoretically people could decide to contribute to both their pension and a Lisa, many people do not have sufficient disposable income to do both. To the extent that they chose a Lisa instead of a pension, they risk not only missing out on any employer contributions into their pension but they risk getting in the habit of ‘opting out’ of pensions.” 

He notes: “In practice I suspect that the main beneficiaries of the Lisa will be the well off, who don’t really need the extra help from the government.

“My other main concern is that they are actually quite complicated. The fact that most providers won’t be offering them from April goes some way to demonstrating the perception that Lisas could easily be ‘mis-sold’.”

Complicating the savings landscape

The FCA flagged similar concerns in its consultation paper, ‘Handbook changes to reflect the introduction of the Lifetime Isa’, as it warned of a general risk of under-saving.

The report states: “One of the government’s aims for the Lisa is to help those eligible to save for retirement. 

“One cause of consumer detriment would be if they were attracted to the Lisa by the government bonus over other retirement provisions that might better suit their needs. The limit for annual contributions of £4,000 and, especially, the 50-year age limit, may lead investors to under-save for their retirement, while assuming they are making adequate provision. Such under-saving would affect retirement income.”

“The Financial Conduct Authority’s decision to add risk warnings to the Lifetime Isa on losing employer contributions to personal pensions are a step in the right direction.Jon Greer

Jon Greer, pensions expert at Old Mutual Wealth, argues the Lifetime Isa actually confuses the long-term savings landscape.

“The FCA’s decision to add risk warnings to the Lifetime Isa on losing employer contributions to personal pensions is a step in the right direction.”

Selftrade conducted its own research, revealing 85 per cent of people do not feel confident about explaining the Lifetime Isa to their friends, while 49 per cent of those questioned feel the Isa space is becoming more complicated.

Where the Lifetime Isa may be of most use is among the self-employed who will, of course, not be part of a workplace pension scheme.

Here, there could be an opportunity for the growing number of this types of worker to build a significant retirement pot.

Ms Vahey suggests: “In the majority of situations, it may be better for savers to join their workplace pension scheme, as they will benefit from an employer pension contribution which will boost their investments.

“For this reason, it’s probably the self-employed investing for later life income who may find it of most use, especially if they are basic rate taxpayers. Higher rate taxpayers will gain more tax benefits through investing in a pension.”

Know your Isa

She also cautions savers not to be caught out by the 25 per cent withdrawal charge which will hit anyone trying to withdraw money from the Lisa for reasons other than buying a first house or retirement.

Figure 1: Example impact of the early withdrawal charge

Source: Financial Conduct Authority

There is no doubt the sheer range of Isas now available is confusing a product that should be fairly simple to understand.

But then the needs of people are becoming increasingly complicated thanks to pensions freedoms and demographic changes.

It is good practice for anyone considering taking out any type of financial product to list the pros and cons before committing their savings to it, or to seek financial advice, and the Lifetime Isa is no exception.

Lifetime Isa savers need to arm themselves with the facts before jumping in.

eleanor.duncan@ft.com