This is what's really wrong with the Lifetime Isa
A recent impact assessment published by the Treasury on the Lifetime Isa (Lisa) estimated that over 200,000 people will be saving into a Lisa in 2017/18, subscribing on average £3,500 per year. Its popularity is expected to grow, with 800,000 Lisa subscribers by 2020 and 2021. So why is this new way to save still facing criticism?
Let's remind ourselves of the key Lisa features:
- Individuals aged at least 18 and who have not reached 40 can subscribe up to £4,000 from their annual Isa allowance into a Lisa
- Once the account is opened, individuals can save in the Lisa up to age 50
- Government is incentivising saving with a bonus of 25 per cent of contributions
- The Lisa will support first-time house buyers and those who are looking to save for retirement, especially the self-employed
- Money, including bonuses and any interest, can be withdrawn without penalty for the first property purchase, from age 60, or in the event of terminal illness
- Withdrawals for any other reason will incur a 25 per cent penalty charge on the amount withdrawn (the government bonus plus a 5 per cent penalty)
There are of course conditions applied to these features, but on the face of it this seems a pretty generous scheme. However, not everyone agrees, and a number of criticisms have been levelled against the Lisa.
One that we agree with is that the cut-off age is too low. There are around 4.6 million self-employed people who are not covered by auto enrolment, many aged over 40.
The Lisa could help to fill that gap in pension provision, so we have already asked the Treasury to look again at this, but at least the Lisa is a start towards addressing the long-term savings needs of the self-employed.
We should remember that the Lisa was launched against a backdrop of the government's review of pensions taxation. Many commentators saw it as a substitute for the reform of pension tax relief that never came.
But that's rather unfair, as it misses the point that the Lisa is a very useful development of Isas, improving and simplifying the existing Help to Buy Isa and bringing the self-employed into scope.
And as the self-employed also includes all those now on zero hours contracts, the Lisa offers a new way to help them save for their future.
It's also been suggested that the Lisa will undermine the success of auto-enrolment. We don't share that concern. Saving via a pension is the best and most tax-efficient way of saving bar none. Individuals get tax relief up-front, at least equal to the rate of the government Lisa bonus.
Pensions tax relief isn't capped at £1,000 a year. Lisa savings is post-tax and post-National Insurance. And Lisa doesn't offer the equivalent of the pensions tax-free lump sum.
On top of which, any employer contribution is the extra icing on top. Where it does help is for those who do not earn enough to be drawn in by auto-enrolment.
CONFUSING ISA LANDSCAPE
Coming hot on the heels of the Innovative Finance Isa, there is a worry that the proliferation of Isas is confusing customers. It's certainly more complicated than it used to be.
We'd like individuals to have the chance to have more than one cash Isa a year, or stocks & shares, provided the overall allowance is not exceeded. But it is not much more complicated than the old days of mini and maxi Isas.
Questions too have been raised about how the government bonus will be paid. The transitionary arrangements mean that individuals face a lengthy period before the first bonus is paid. But from 2017/18 onwards it will be paid monthly.
Of more concern is that any non-qualifying withdrawals will trigger a bonus clawback - even when the bonus has not yet been paid.
So, if an individual withdraws the whole of their account (but doesn't close it), the Lisa provider must withhold 25 per cent of what the individual withdraws, and when the bonus is later claimed and paid, withhold 25 per cent of the bonus to be repaid to the government.
We think it would be fairer all round to allow any non-qualifying withdrawals in the first year to be permitted without penalty, as no bonus will actually be paid in 2017/18.
While it's right that any bonus, plus (or minus) any investment growth should be refunded to the government in the case of non-qualifying withdrawals, we don't believe the penalty charge of 5 per cent is necessary and hope that this will be reviewed before the scheme launches.
Isas are hugely popular with savers and investors across the UK, and the increase in the annual subscription limit to £20,000 from next April will make the regime even more attractive. We think the Lisa will be a valuable addition to the Isa stable.
It might not be perfect and it can be improved, but the commitment to encouraging saving and reaching out to younger savers (first-time buyers) and to the self-employed is one we should all welcome.
Carol Knight is chief operations officer at Tisa.