Lifetime Isa and suitability reporting

We all know that there is a catch to the Lisa product however, and somewhat inevitably, we have a valuable new addition to adviser’s kit bags.

So, the new risk warning is:

You are prepared to risk a net penalty of 6.25 per cent if you access your Lisa early in exchange for a potential 25  per cent net reward. If you keep your Lisa to age 60, or use it to purchase your first home up to the value of £450,000, subject to further qualifying criteria, then you keep the 25  per cent bonus, access under any other circumstance will lead to a net 6.25 per cent penalty.

Other than this – it is an Isa.

The maths is remarkably simple. When paying into a Lisa one receives an extra 25 per cent, in other words; the premium is enhanced by 1/4, and so the initial premium is 5/4 of an Isa premium.

We have read in the trade press and other press sources that a Lisa will represent a very small part of an individual’s retirement portfolio. This is clearly nonsense.

If a client needs to access it early then they receive their money after a 25 per cent penalty. Putting it another way they receive 3/4 of their money back.

As the compound growth formula is P x (formula), manipulating P has no effect on the growth, ergo the return before age 60 will always be 15/16ths, or 93.75 per cent (this being 5/4 x 3/4).

Some firms are refusing to advise in this area. I would argue that they can no longer advise anyone who is in employment under the age of 40 in an appropriate manner. 

This is obvious as if they are under 40 they can buy a Lisa – which is far more flexible than a pension. Additionally, if they are in employment then they would likely to have a pension due to TPA 2008 etc.

Advising anything other than a Lisa would likely be inappropriate.

If that individual is self-employed then I’d urge caution as to whether pension/Lisa was necessary and, as financial planners, there are a few technical distinctions between the two that planners should be wary of.

The state pension age is changing. From 2028 then everyone will have an old age pension from age 67. This matters here as the minimum pension age is set to change to 10 years before the state pension age. 

However, this change has yet to come in, S.279 of FA 2004 remains unchanged after former chancellor George Osborne’s Taxation of Pensions Act 2014. Some would argue it might not; given that it has been three years since the age change was first mooted.

The first distinction is that a pension can be accessed tax-free from age 55, with the legislative risk and a Lisa can be accessed tax-free from age 60, with an Isa being accessed tax-free at any time.

All have the same tax treatment of assets in that they pay PTM and SDRT and that is about it.

They have different limits in that an individual has a £20,000 annual limit into Isa, of which £4,000 can be Lisa and the pension annual allowance is very basically; the lower of £40,000 or 100 per cent of relevant UK earnings.

This is all very well and good for a thrusting young city exec with a £150,000 salary, £40,000 into pension, £16,000 into Isa and £5,000 into a Lisa leaves about £5,000 net a month to live on – not bad.

What about normal 30-somethings though?

Let’s assume a salary of £30K, of which £2,400 is going into a workplace pension. They can afford to save £100 a month, where should it go?

Flexibility of access – well, a pension pays around 90 per cent in unauthorised payments charges and tax to take money out before age 55 and the Lisa charges 25 per cent for access before age 60, with a normal Isa charging 0 per cent. In terms of flexibility the Isa has it, just about followed by the Lisa and the pension last.

Bonuses – The pension will, effectively, receive relief at 20 per cent of the gross premium, as will the Lisa and the Isa receives none; the bonuses are the same for the pension and the Lisa.

Charges – Traditionally pensions charge more, and due to the government allowing returns for Lisa administrators to be delivered using similar systems to the Isa, the Lisa and the Isa will most likely the cheapest option.

Overall, therefore, the Lisa seems to be the best product.

Finally, we have read in the trade press and other press sources that a Lisa will represent a very small part of an individual’s retirement portfolio. This is clearly nonsense. 

A 35-year-old, investing £100 a month for 25 years and getting 5 per cent will return an extra £14,300 from the bonus, and those who can afford the maximum £4,000 a year will net an extra £47,700 on the same basis.

It is challenging to comprehend the commonly held position that clients won’t put up with a bit of complexity for an extra £45,000.