Despite its critics, the Lifetime ISA will become part of the UK savings landscape in April. Each tax year, UK residents aged 18-40 will be able to pay up to £4,000 into a Lifetime ISA with their contributions qualifying for a 25% government bonus until age 50. Withdrawals are permitted to help buy a first home worth £450,000 or less. Withdrawals can also be made after age 60 or if the saver becomes terminally ill.
However, within 24 hours of the Treasury’s announcement on 7 September, Nationwide and Standard Life declared they would not be offering the new long term savings scheme due to its “harsh” and “overly punitive” penalties. Some other providers remain undecided as to whether they will embrace or reject the Lifetime ISA.
A 25% fee is levied on the total fund (including investment growth) if the policyholder withdraws money before 60. If the money is not spent on a home, an extra 5% will be charged on the amount withdrawn. Providers fear customers might not understand these implications and end up disappointed.
The policy, which effectively offers under-40s an alternative to pensions, has also been criticised for muddying the waters between ISAs and pensions. Withdrawals are tax-free and former pension minister, Baroness Ros Altmann, warned that young people could be tempted to opt out of a workplace pension in order to pay into the Lifetime ISA.
Although some features are yet to be defined, calls for the Government to rethink its proposition are unlikely to result in an about-turn. The Treasury says the Lifetime ISA promotes flexible, focused saving.
Indeed, the Lifetime ISA is designed both to help first-time home buyers and to provide a fund for use in retirement. The challenge will be to communicate it as a savings vehicle, not a pension: after all, the financial strategies for saving for a house and for a pension are not the same.
Despite some hybrid features, the Lifetime ISA is certainly not a pension alternative. It cannot be relied upon as a pension and is vulnerable to future tinkering. Additionally, it lacks the safeguards built into a pension with respect to fund withdrawal post-60: only 25% of a pension fund is tax-free thereby incentivising people to limit how much they withdraw.
That the Lifetime ISA provides savers with choice and reaches out to the young Millennials are very positive attributes. However, with respect to retirement, the task is to encourage savers to use the Lifetime ISA as another string to the retirement income bow. Used strategically, it will be a powerful complement to a pension. So long as we have a clear pension regime, and with the clarity that it is a long term savings vehicle, the Lifetime ISA is very good news.