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?
Employer contributions
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.
Benefits
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.
Many IFAs will advise clients for whom this is appropriate to take advantage of this as another tax-incentivised savings vehicle for themselves, or their family. But is this a sensible use of taxpayer resources?
Lisas may unhelpfully undermine confidence in pensions and confuse younger people into buying an unsuitable product.
If they later discover they would have been better off in pensions, or have to pay a large penalty just to take their money out, the prospects for a mis-selling claim are clear.
Baroness Ros Altmann is a former pensions minister
Against: Daniel Elkington
As this is an opinion piece I am not going to cite the politicised, regressive, and intergenerationally discriminatory waffle and garbage the Treasury select committee has pumped out, and simply deal with the facts of this tax wrapper.
The Lifetime Isa (Lisa) is an improvement on the Help to Buy Isa (H2B Isa).
The Help to Buy Isa cannot be used for the deposit as the bonus is claimed on completion. The contract does not work, check the gov.uk website if you do not believe me.
The Lisa can, as the bonus is added shortly after the money is deposited.
Savers can only put £200 a month into the Help to Buy Isa, with an initial £1,000 deposit, and you can only get a 25 per cent bonus on sums between £1,600 and £12,000.
With a Lisa, savers can pay in £4,000 a year, and there is no lifetime cap, so you can pay more in and get more tax relief.Even if we viewed this as a Help to Buy replacement, it is clearly progressive.
Tax-free withdrawals
As a pension, it is better for basic-rate taxpayers. The bonus is equivalent to basic-rate relief, except at retirement you can take money out tax-free from a Lisa, but only 25 per cent is tax-free in a pension.
The average contribution among those paying into a Lisa, and not for the purpose of a house purchase, is £75 a month, according to an article in Financial Adviser – so we can ignore contribution limits.
In addition, there is more flexibility with the Lisa as you can take money out early if you are desperate and face a 25 per cent penalty.
However, I will admit that this needs to be clearer. You could take your money out of a pension early and face the unauthorised payments regime, which is much more expensive than 25 per cent.
Let’s turn to popularity: “nobody is using it so we might as well ditch it”. Well, the government screwed up initially by suggesting that the bonus needed to be added in real time.
Providers, faced with this and uncertainty around take-up, initially declined to get involved, except Transact, of course.
Since clearing this up so that providers get the bonus via a similar system to pensions tax relief, providers have started to offer it. According to an article on Financial Adviser, Skipton said in December 2017 it had opened 48,000 Lisa accounts.
Popularity
Nutmeg seems to believe the Lisa to be popular, while AJ Bell is also enjoying inflows from the tax-wrapper.
If the government were to clear up the communication around the Lisa, then it would be even more popular and become a mainstream product, which, as outlined, is clearly of benefit.
The Help to Buy Isa is going, so making all providers convert these accounts into Lisas would force a lot of providers into the market, much in the same way it did with personal equity plans and tax-exempt special savings accounts, and the bonus system is now relatively easy to administer for these providers.
My fear is that Help to Buy goes, the Lisa is abolished, and the ministers cancel the lifetime allowance with the savings. I think they should complete a declaration of interest before they do this: it would be really interesting to learn how many of them are over, or are likely to be over, the lifetime allowance.
Daniel Elkington is a chartered financial planner at MT Financial Management
