The Lifetime Isa was branded the latest mis-selling scandal waiting to happen by former pensions minister Ros Altmann.
This week the government’s latest idea became a reality – albeit one with limited availability as FTAdviser only had Hargreaves Lansdown, The Share Centre, Nutmeg and AJ Bell able to reveal how much it will cost to open a Lifetime Isa with them.
On paper, this tax-free savings vehicle sounds like an exciting new bit of kit aimed at 18 to 39-year-old savers who need to muster a deposit for a home or save for retirement.
However when you pick at the Lifetime Isa it starts to look more and more like one of those multi-bit ratchet screwdrivers – great if you are planning on a lot of DIY not much use if you just are putting together the odd bit of flat pack furniture.
With this product the harsh reality is it is great for some but Ros is right – a mis-selling claim waiting to happen for others.
You could end up getting back less than the savings you initially put in your new Lifetime Isa if money is withdrawn early.
I believe you should you make sure you flag it as an option and talk through the pros and make crystal clear the cons.If you need the funds for a financial emergency so you have to withdraw the cash for a reason other than to buy a home or pay for your retirement from 60 a 25 per cent exit penalty is applied.
As Suzanne Briggs, director of tax and advisory practice Blick Rothenberg, summarises: “The Lisa may not be appropriate for everyone due to the exit penalties if money is withdrawn for any other reason other than those permitted.
“If you need access to the cash after April 2018, you will pay a 25 per cent exit penalty.”
So for example, if you put in £4,000 and receive the 25 per cent government bonus of a nice extra £1,000, your Lisa is worth £5,000
Your clients may therefore only receive £3,750 back.
Even if the value of the fund grows steadily at the rate of say 4 per cent, Ms Briggs noted the impact of the exit penalty could mean that you would get back less than the growth in value of the fund.
Another point to tackle aside from the penalties is although the Lisa is designed to work alongside pensions, those seeking to save for retirement may be better off maximising their pension contributions in the first instance.
As a retirement planning tool, Ollie Smyth, York-based IFA at Walker Crips Wealth Management, said the Lisa could be viewed as a supplement to pensions, but certainly not a replacement.
He also noted the Lisa remains subject to normal Isa rules and would be included in any estate calculations for inheritance tax, unlike pensions.
Though pension death benefits do fall under the remit of income tax should death occur after 75 years of age, Mr Smith said effective intergenerational planning can effectively mitigate this to a large extent.
Nigel Peaple, deputy director defined contribution, lifetime savings and research, Pensions and Lifetime Savings Association, added he does not believe the product should be used as a replacement for a workplace pension.
The Lisa does not provide the strong governance commonplace in a workplace pension, nor the value for money ensured by the charge cap, nor a default fund designed to meet member needs, Mr Peaple pointed out.
Crucially, unlike workplace pensions, the Lisa does not benefit from mandatory employer contributions.
All of this complexity must make it tempting to ignore the Lifetime Isa – but remember you do so at your own peril as it isn’t just what you recommend but what you fail to mention that can get you in trouble these days.
The Lifetime Isa can be a good financial product for first-time buyers, comfortably making workplace pension contributions but yet to buy their own home and who wants to save for a deposit to buy a house.
So, what approach will you take to talking about the Lifetime Isa? I believe you should you make sure you flag it as an option and talk through the pros and make crystal clear the cons.
The Lifetime Isa has all the hallmarks of a damned if you do recommend, damned if you don’t deal so to ignore this product would be foolish.
emma.hughes@ft.com
