The clock is quickly ticking down the weeks and days until the Lifetime Individual Savings Account (Lisa) launches. Planned for April 2017, this initiative was announced in the Budget 2016 and is intended to provide a dual savings role for the under-40s to target both their first house and their retirement at the same time. Investors can save up to £4,000 and receive a 25% bonus from government. The downside is if the money is withdrawn early – for example not for a first house purchase or before the age of 60 – then the bonus plus any investment growth is clawed back plus an additional 5% charge on the pot.
Since then the industry has been waiting for detail on the shape of the Lisa and how it will work in anticipation to be able to offer the product to their customers as soon as possible. Luckily, despite the lack of some information so far there has been has been no lack of motivation to offer what is a great incentive to encourage young people to save.
But then this month we had some progress; The government published its Savings (Government Contributions) Bill outlining how it plans on contributing to Lisas and to Help-to-Save accounts. And in quick succession after that it has updated its design note to give us a fuller picture of how Lisa will work in practice.
The design note, in particular, has helped gel what we know about Lisa. For example, it now seems a certainty it will launch this April. We know that no contributions above the £4,000 will be accepted – removing a problem for providers (who would have had to keep contribution up to this limit separate). And the charge-free withdrawals have initially been narrowed to withdrawals at age 60 and first-house purchase. However, the door has been left open to include other charge-free withdrawals in the future for scenarios such as financial hardship or loans.
Importantly, the design note also indicated a change in the timing of payment of the government bonus. In the first year – 2017/18 – the government bonus of 25% will be added to the Lisa account at the end of the tax year. But from April 2018 onwards this will change, and Lisa providers will be able to claim the bonus on a monthly basis, meaning consumers get the benefit of the bonus being paid earlier (and earning investment growth from it sooner).
We are still waiting for regulations to either clarify or fill in missing vital bits of information. Particularly around the area of what data Lisa managers have to submit to HMRC, and when, to either claim bonuses or progress withdrawals. These regulations should be issued soon, hopefully in time to be discussed in the Commons as part of the Committee stage of the Bill. But until we get all the bits and pieces it’s difficult to get a complete picture of how the product will work in practice.
Although, it’s good to see more information emerge about Lisa, I think the shine is coming off the government’s plan in two key areas. The first is the 25% withdrawal charge If someone accesses their money ‘early’ (before age 60 when it’s not for the purchase of a first house) which will go straight to government - not providers. On the face of it, without mathematical interrogation, this charge could seem equitable. You get a 25% government bonus on the way in, and a 25% withdrawal charge on the way out. But of course, this hides the truth that the withdrawal charge claws back the bonus and any investment growth. Plus it imposes a 5% charge on the value of the whole pot at the time of withdrawal, again including any investment growth.
This charge will eat into the client’s own money and any investment growth they have earned. Certainly, if the client thinks they may not be able to stay the distance and keep their money invested in Lisa until first house purchase or age 60, then they should think long and hard about taking one out. The 25% bonus can seem appealing, but it can so easily be lost – just by accessing the funds early - and an additional 5% penalty is an incredibly high price to pay.
The penalty seems even more confusing in principle when compared with current government policy to impose a maximum 1% exit fee on pensions – again, due to come in from April 2017. Maybe a case of ‘do as we say, not as we do’..
The main detail for advisers must be adviser charging. The updated design note clarified that fees and charges for managing a Lisa can be paid directly to the Lisa manager without incurring a 25% withdrawal charge. But we would like to see this extended to include adviser charges as well. People need help to work out the best way to save for their goals in life – be that a house or funding later life. Allowing adviser charging from the Lisa would give people the ability to use the funds they have built up to pay for regulated advice to help them make the best possible decisions for their personal circumstances.
Despite the looming target date of April 2017, Lisa seems some way off becoming a reality. The government now has the task of confirming the final details of how it will work, and quickly, as well as considering if a 5% penalty is fair to savers. If not, the withdrawal penalty should be reduced.