What is in store for the Lisa?

Carol Knight, chief operations officer at the Tax Incentivised Savings Association (Tisa) said, following the introduction of Isas in 1999, there was a drive to simplify the offerings. However, over the past four years, the Isa sector has gradually become more complicated.

There are now six different Isas: stocks and shares, Junior Isas (Jisas), Help to Buy (H2B), Innovative Finance, the Lisa and cash Isas. 

Ms Knight said: “We have some flexible Isas and then we have stocks and shares. It just gets too complicated for people to find their way around a product set.”

An individual can only subscribe to one cash Isa in any tax year, which according to Ms Knight presents a big problem for savers.

The Treasury Committee recently called on the government to abolish the Lisa, criticising the product for “its complexity and its inconsistency with the other parts of the long-term savings landscape, which has contributed to its limited take-up by customers and providers”.

Hargreaves Lansdown is one of the largest providers of Lisas – it has 40,000 Lisa customers.

Key points

• There are now six different Isas available
• The Lisa has had a mixed response from providers
• The Lisa seems to be more popular as a product for saving for property purchase

Tom McPhail, head of retirement policy at the company, said although it had been a “slow burn” for people to open up Lisa accounts, in more recent times the momentum had increased.

For Mr McPhail, the Lisa addresses some consumer needs that are not being adequately catered to – for example, self-employed individuals who would not be part of an auto-enrolment scheme as a full-time employee would, and younger basic rate tax-payers.

Danny Cox, head of communications at Hargreaves Lansdown, added: “If you are going to just look at a Lisa you have to look at it as a wider simplification of the wider Isa system. The Lisa is not perfect, but it is a good thing for savers.”

Likewise, Tom Selby, senior analyst at AJ Bell, said he did not agree with the conclusions of the committee, as he did not think they had set out a coherent argument.

Mr Selby said: “It is a relatively simple product. People understand the idea of a 25 per cent bonus. The fact that bonus is paid monthly is a good thing as they can benefit from the compound growth.”

Although Mr Selby argued the government did not make a strong enough case to scrap the Lisa entirely, he acknowledged that there were still flaws in the product.

Drawbacks

One of the main drawbacks to the Lisa, savings experts say, is that if a withdrawal is made from the Lisa account for anything other than a house purchase, then the entire amount is hit with a 25 per cent penalty. This penalty element particularly has put off a lot of providers from entering the market.

When the Lisa was set up, it was also seen as a good vehicle to help self-employed individuals save, but an individual can only open a scheme if they are aged between 18 and 40.

The Lisa excludes a large chunk of that group, as self-employment is most prevalent in the 45 to 54 age group.

Mr Selby said: “It seems unfair to me that 40 is the maximum age at which a person can open up a Lisa. With the extra penalty, explaining that to a person is not as straightforward as it could be.”

Ms Knight said from a provider’s perspective a Lisa is also more complex to administer.

She added: “The technology for reporting is something additional providers have to [put in place] and having to pay back the penalty is not an attractive option.

“The other problem is that it can cover a house purchase and/or pensions. Putting a deposit on a house could take, say, 10 years and paying into savings for a product they will use for retirement could take 40 years. When you look at those two different timeframes, is it sensible to have one product that is trying to meet two different types of investment portfolios? Possibly not.”

“The original reason for the Lisa was to solve the problem of the younger generation who found it difficult to fund retirement.Jon Greer

Jon Greer, head of retirement policy at Old Mutual Wealth, added: “Some providers are worried that unless a customer has a financial adviser next to them who is able to make that assessment for them of the best value, is it the best thing? They are worried there could be claims of mis-selling and this might be the last thing anybody really wants to get into.”

For this reason, Mr Greer said he is not fully persuaded that there is a need for a hybrid product that enables an individual to save for a house and to have a long-term saving option, because it makes the product more complex.

Auto-enrolment

Additionally, the issue of trying to get people to save for retirement is starting to be addressed by auto-enrolment.

According to the Office for National Statistics (ONS), auto-enrolment has led to huge gains in pension participation in groups like the young and lower paid, who often were not provided with pension schemes.

Nearly 63 per cent of private sector workers aged 22 to 29 paid into a defined contribution (DC) pension in 2017, up from just 16 per cent in 2012.

Mr Greer said: “The original reason for the Lisa was to solve the problem of the younger generation who found it difficult to fund retirement. What the Lisa shows is that for the people using it they think it is quite a good vehicle for house purchases and that is the main reason they are taking it out.

“I think it would be unwise of me to say you need to scrap the Lisa, because there are clearly some elements of the Lisa, like the house purchase, which people like and that you can get the money out for house purchases without a penalty.”

Mr Greer also suggested that the government-backed National Employment Savings Trust (Nest) sidecar scheme, due to be trialled in the autumn, could be a potential solution for the self-employed.

Tisa is currently working on its own recommendations on how the Lisa should be reformed, which it will submit to the government in the coming months.

The H2B Isa scheme, which is set to end on 30 November 2019, captured a pent-up demand for people looking to buy properties, which is why take-up was strong, but there were two key problems with it, Ms Knight added. As the scheme is a cash Isa, it means that a person cannot set up a cash Isa anywhere else in the same tax year.

The annual subscription for a Lisa is £4,000 which is almost double that of H2Bs at £2,400.

In its recommendation, Tisa will request that the 25 per cent penalty is scrapped. If someone withdraws their money for anything else other than a house purchase, they should give the bonus back but the penalty should not be imposed for the whole capital.

The organisation will also recommend a specifically targeted Lisa for house purchases, and a different savings vehicle for retirement.  

Ms Knight said: “The advantage of both of those is that is a matching product. People do not really understand how tax relief works. So the matching concept is understandable to people in a much better way than tax relief. For every pound you save in a Lisa, the government gives a bonus of 25 per cent.”

Ima Jackson-Obot is a features writer for Financial Adviser and FTAdviser.com