The Financial Conduct Authority should consider banning cash-only Lifetime Isas because they are inappropriate as retirement savings products, life company Aegon has said.
Failing an outright ban, the life company said cash-only Lisas must come with warnings informing the customer that the product is not intended to be used for retirement.
The call came as the FCA prepared the regulatory framework for the controversial new savings vehicle, which combines elements of the Help to Buy Isa with a watered-down pensions Isa.
Aegon's pensions director Steven Cameron said that if, as expected, a number of providers offer cash-only Lisas, then customers must be warned not to use them as alternatives to pensions.
If they do, he pointed out they would be condemning themselves to returns far lower than those delivered by standard pension products, which are heavily exposed to equities.
He said this was a particular problem because only people under 40 would be permitted to open a Lisa. They would therefore not only be guaranteed close to zero per cent capital growth, but would also be losing several decades of compound interest.
"The FCA draft handbook rules make specific mention of 'cash-only' Lisas which can invest only in assets which can be held in a cash deposit Isa," Mr Cameron said.
"We question whether these should be allowed to be marketed as Lisas as it is highly unlikely that they will be appropriate if saving for retirement over a period of at least 20 years."
He said the "Lifetime Isa" label was likely to become associated with house purchase or retirement savings, creating the risk of confusion if some Lisas were only suitable for the former.
"If allowed, their marketing must include additional risk warnings to highlight they are not suitable for retirement savings. This warning should be reissued periodically to ensure those whose objectives have changed don't remain invested in cash as part of their long term retirement planning," Mr Cameron said.
The product, announced last year in George Osborne's final budget as chancellor, was widely seen as a watered-down version of the even more controversial full pension Isa initially proposed.
Though less of a direct challenge to pensions, the Lisa nevertheless drew heavy criticism for its potential effect on retirement savings - in particular the likelihood that it would encourage people to opt out of auto-enrolment.
But so far little attention has been paid to the dangers of using a cash Lisa as a retirement savings vehicle.
FTAdviser asked the FCA to respond to Mr Cameron's recommendations, but they declined on the grounds that the regulatory consultation was ongoing.
The bill containing the Lifetime Isa became law on Monday (16 January), meaning providers will theoretically be able to offer the product by 6 April this year.
However, with the FCA's guidelines yet to be released, it remains unclear how many providers, if any, will have a Lisa ready by that date.
james.fernyhough@ft.com
