The architect and most prominent supporter of the Lifetime Isa has hit back at critics of the new product following a string of negative media reports that presented the product as a threat to pensions.
Michael Johnson, a research fellow at the Centre for Policy Studies, said most of the criticisms of the Lifetime Isa, or Lisa, were either misdirected or simply wrong.
He denied claims it would encourage people to opt-out of auto-enrolment and he also said criticisms of the Lisa's "tax, exempt, exempt" model were missing the point, calling the TEE versus EET debate a "red herring".
"Consider pensions. Over 50 per cent of pensioners pay no income tax at all, because of the rapid rise in the personal allowance. So, for them, [it's] not EET, but EEE," Mr Johnson told FTAdviser.
"Similarly, the Lisa will not be TEE for 84 per cent of the workforce, who pay only basic rate income tax. The bonus is numerically equivalent to 20 per cent income tax, so for them, the Lisa is EEE."
The Lisa was unveiled by then-chancellor George Osborne in his 2016 March budget, as a hybrid of a souped-up Help to Buy: Isa and a pension Isa.
Due to launch in April 2017, it will allow people under 40 to put aside up to £4,000 a year, plus a 25 per cent government bonus, either towards a first home or their retirement.
Criticism of the Lisa ramped up in recent weeks after HM Treasury released details of the product design, confirming they would be going ahead with the controversial policy.
Former pensions ministers Ros Altmann and Steve Webb have been the most vocal critics of the Lisa.
Mr Webb called it "an abomination" and "a horrible hybrid", while Baroness Altmann said it was “the worst type of pension policymaking”, singling out the entirely tax-free drawdown as having "all the wrong incentives".
Another criticism of the Lisa came from Robert Booth, director of investment and product development at auto-enrolment provider Now: Pensions.
He warned lower-income workers, such as those enrolled with Now: Pensions, may be lured out of auto-enrolment by the Lisa, because they "don't have enough money to do both".
While he said "sensible people" would stick with the workplace pension, because of the employer contribution, he said the instinctive appeal of the Lisa and its accessibility would attract a lot of people to set up a Lisa.
But Mr Johnson denied the Lisa would force people to choose between saving for a house and a pension.
"I would suggest that Gen Y are already making the choice between saving for a pension and for their first home, before the advent of Lisa. They are therefore already missing out on tax relief," he said.
He went on: "The Lisa recognises that this is happening, and adds the 25 per cent bonus to make up for Gen Y foregoing tax relief. That would appear to be a substantial improvement on today’s reality."
As for people foregoing the employer contribution, Mr Johnson said the answer was to allow employers to contribute to a "Workplace Isa", which he said would "complement the Lisa". The government, however, has so far decided against this course.
Another criticism of the Lisa is that it may favour the children of wealthier parents, who could open Lisas for their children. Given the government bonus is 25 per cent of contributions up to £4,000, this could mean that the most tax relief could end up going to those who least need it.
But Mr Johnson denied this was a valid argument, saying: "Wealthier parents will always find tax-efficient ways of supporting their children."
He cited the £3,600 allowance, the 7 year sliding-scale tax rule on wealth passed down before death, and "higher rate tax relief that saves money for the parent who is then in a position to leave more to their children".
The Lisa has met with a lukewarm reception from financial advisers, largely because most IFA's clients are either over 40 or already home owners.
However, Chris Daems, director of Cervello Financial Planning, said the Lisa would be appropriate for some clients.
He said: "As part of the financial planning toolkit the Lisa will play its part and the tax advantages are particularly beneficial to those under the age limit.
"Whilst the majority of our clients are in an older demographic this isn't exclusively true and we will be looking at seeing where the LISA fits with the families we work with."
Potential product providers are currently awaiting the final rules from Treasury, as well as the consumer protection framework from the Financial Conduct Authority. Consultation on the latter is expected to begin imminently, a Treasury official stated this week.
james.fernyhough@ft.com
