Experts debate the merits of the Treasury select committee's recommendation to abolish the Lifetime Isa.
For: Ros Altmann
The Lifetime Isa (Lisa) could be of benefit to some individuals. However, the product rules, restrictions and penalties make it too complex to be sold widely without advice.
Lisas need proper risk warnings and suitability checks, but many of the target market will not have an adviser to help them.
In the absence of proper safeguards, there are clear dangers of mis-selling or mis-buying.
Taking money out early entails a draconian penalty. Will people understand that the 25 per cent withdrawal charge is not just repaying the taxpayer bonus – they will have to pay around a 6 per cent penalty too?
If employees opt-out of their employer’s pension scheme in order to save into a Lisa, they could lose out on employer pension contributions, higher-rate tax relief and national insurance relief, too. This would make them worse off in retirement than if they had put their money into a pension.
As auto-enrolment brings millions more people into pensions saving, and opt-out rates are low, this success should not be jeopardised by confusing the landscape with an alternative, potentially inferior product.
Lisas could undermine future retirement security. More is likely to be saved in cash giving lower, long-term returns, charges may be higher than pensions, and allowing full withdrawal, tax-free, from age 60 embeds perverse behavioural incentives.
People are encouraged to withdraw all the funds in their 60s rather than keeping money for much later in life, whereas retirement saving ideally needs to provide pensioners with money into their 80s and beyond.
Pensions are more likely to last a lifetime than the ‘Lifetime’ Isa due to more sensible behavioural nudges that should incentivise larger sums in the fund, invested for longer.
Pensions have the advantage of automatic-enrolment, employer contributions that do not stop at age 50, and tax rules to deter premature withdrawal, with unused funds being inheritance tax exempt. Today’s taxpayer subsidy for Lisas might be wasted if the products leave savers more at risk of later life poverty.
The Lisa is a hybrid product that can be used to save for a house purchase or for later life. But those saving to buy their first home already had Help To Buy Isas for that purpose. Why confuse the Isa brand – originally designed as a ‘simple’ savings product – with a product for two such different purposes?
These two aims should be kept separate, rather than trying to complicate the choices on offer.
However, I do accept that Lisas offer advisers an excellent extra boost for wealthy savers or families who have already maximised their pension allowances. Those who have filled their annual allowance, or reached their lifetime allowance, or already paid maximum contributions into a spouse or grandchildren’s pensions, can benefit from this extra taxpayer subsidy.