MSE News: Savers to be warned of risks before opening a Lifetime ISA

MSE_Luke

Anyone wanting to open a Lifetime ISA will be first made fully aware of how the product works, under FCA proposals...

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'Savers to be warned of risks before opening a Lifetime ISA'

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dunstonh

It is a flawed product. It brings two totally unrelated transactions together into a single wrapper and creates the opportunity for confusion given the extremely high tax cost for getting it wrong.

I bet there will be people who opt out of workplace schemes to do a lifetime ISA.

Ed-1

dunstonh wrote: »

It is a flawed product. It brings two totally unrelated transactions together into a single wrapper and creates the opportunity for confusion given the extremely high tax cost for getting it wrong.

I bet there will be people who opt out of workplace schemes to do a lifetime ISA.

It's not a flawed product. It's a product with huge potential. It's the media and others that are mis-communicating it. It's a savings account for life with Government top ups. It's not a pension. It's a savings account which can be used through working life (unlike a pension) and also at retirement. It's to be used alongside, not instead of, saving for retirement.

There are life events that the LISA savings together with Government top ups can support. At the moment, there is just first-time house purchase but in the future a range of others could be added in - whatever the Government of the day wants to support.

The Government are also still considering LISA flexibility - where, like flexible ISAs, money can be withdrawn and then replaced to reclaim the bonus.

The current policy is just the start. When further terms are added in to the LISA, it will become clear that this isn't a product designed just for house purchase or retirement saving.

dunstonh

It's a savings account for life with Government top ups. It's not a pension.

And what are the objectives it would be used for?
And why would someone use a savings account for such a long term?

t's a savings account which can be used through working life (unlike a pension) and also at retirement.

Used at a cost. And did you say "also at retirement"? You mean like a pension?

It's to be used alongside, not instead of, saving for retirement.

So, just like the more tax efficient pension then.

There are life events that the LISA savings together with Government top ups can support. At the moment, there is just first-time house purchase but in the future a range of others could be added in - whatever the Government of the day wants to support.

Does that mean you expect there to be moving goalposts?

The current policy is just the start. When further terms are added in to the LISA, it will become clear that this isn't a product designed just for house purchase or retirement saving.

The UK used to have a lot more tax wrappers than it does today. The numbers were reduced as it was too complicated and mistakes in buying and selling were made. And now we have a new one that is aimed at young people buying a house but also retirement planning but not quite as good as a pension. Its not available to all because of the age limit. It suffers exit penalties in an era when exit penalties have all but been removed.

I get what they are trying to achieve but it is far too complicated and there will be issues. There will be opt-outs on workplace schemes with people using the LISA. There will be people using investments when they should be using savings and savings when they should be using investments. There will be those without self control drawing their retirement fund with a tax penalty when they shoudlnt.

Ed-1

dunstonh wrote: »

And what are the objectives it would be used for?
And why would someone use a savings account for such a long term?

Isn't that what saving is for - spending in the future? Savings can be held in stocks/shares or cash.

dunstonh wrote: »

Used at a cost. And did you say "also at retirement"? You mean like a pension?

It shouldn't be at a cost if it's used properly. Save in a LISA as you used to in an ISA.

dunstonh wrote: »

Does that mean you expect there to be moving goalposts?

It's not really moving the goalposts at all. The Bill (which will become an Act of Parliament) that will bring the LISA into law allows regulations to be made under it to set various 'parameters' from time to time; as with any Government product it's not fixed at the point it's taken out, terms may change.

For example in Part 3 (Withdrawals not triggering charge):

(2) Treasury regulations may specify other withdrawals from a Lifetime ISA to which paragraph 8 [charge when unlisted withdrawal made] does not apply.

Moving the goalposts is what law making is all about: changing, amending or adding to laws made in the past.

dunstonh wrote: »

The UK used to have a lot more tax wrappers than it does today. The numbers were reduced as it was too complicated and mistakes in buying and selling were made. And now we have a new one that is aimed at young people buying a house but also retirement planning but not quite as good as a pension. Its not available to all because of the age limit. It suffers exit penalties in an era when exit penalties have all but been removed.

I get what they are trying to achieve but it is far too complicated and there will be issues. There will be opt-outs on workplace schemes with people using the LISA. There will be people using investments when they should be using savings and savings when they should be using investments. There will be those without self control drawing their retirement fund with a tax penalty when they shoudlnt.

The Lifetime ISA is not complicated. It gives people flexibility to save in stocks/shares or cash or both (as you can have multiple LISAs over different tax years) and hopefully will give people the flexibility to withdraw and then reclaim the bonus (i.e. escape the withdrawal charge for unlisted withdrawals) once the 'loan' feature is added in:

1.41 The government is continuing to consider whether there should be the flexibility to borrow funds from the Lifetime ISA without incurring a charge if the borrowed funds are fully repaid, and whether there should be other specific life events where individuals can have access to their Lifetime ISA without a government charge. However, the government has decided that these will not be a feature of the product when it becomes available in April 2017.

I'm all for giving people options and financially educating them at school. We shouldn't reduce flexibility and choice on the grounds that some people may make the wrong choices.

The Lifetime ISA concept is saving for your lifetime. The 'lifetime events' (marriage, redundancy, education etc.) that the Government will support you to save for (i.e. make it a charge-free withdrawal) will change from time to time. Any money left when you reach age 60 can be used as you wish together with all retirement savings in your pension.

jimjames

Ed-1 wrote: »

It's not a flawed product. It's a product with huge potential. It's the media and others that are mis-communicating it. It's a savings account for life with Government top ups. It's not a pension. It's a savings account which can be used through working life (unlike a pension) and also at retirement. It's to be used alongside, not instead of, saving for retirement.

I'm afraid I agree with Dunstonh that it's a flawed product and I don't think there is any miscommunication.
A savings account for retirement is a very bad idea and LISA will tend to push people towards remaining in cash when long term they should be investing as pensions would. It's also not a great idea to be spending your pension money age 40 when the early years are the ones that will have most opportunity to compound.

veryintrigued

In this world of uncertainty looks like a great addition (and diversification) to pensions.

TheBanker

I agree - it almost feels like encouraging people not to use the correct product (pensions) to save for old age...

I was talking to a friend the other day who was saying he was unhappy as he'd started a new job and they had enrolled him in the company pension. He "doesn't trust pensions", and would rather make his own arrangements. But his arrangements are putting £100 a month into the which ever high interest current account he's opened recently. He is the kind of person who will "fall for" the LISA, especially as it will appear to be a government 'approved' way of saving for retirement.

bowlhead99

The problem is not really with the features of the LISA, which I agree with veryintrigued and Ed can be a useful complement to pensions.

Even without qualifying to use it for a house purchase, I would happily get one myself if I was a couple of years younger and allowed to do it: the lack of 40% tax relief on the way in is somewhat countered by being 100% non-taxable in retirement, and to me a good benefit is being able to draw a portion of it out (albeit with penalty) if you have overcommitted, whereas you can't do that with a pension.

No, the problem is not the features, each of which can be useful to the savvier savers and investors among us. I would rather a product with those features existed, than didn't.

The problem is that it does not come with a free financial education, which means that huge numbers of people will not understand how this fits in with their other savings and investment products in the optimum way, and what they should do with the account.

The public's understanding of how to use the accounts will be led by the providers' marketing materials and the tabloids and the bloke down the pub - like TheBanker's mate who doesn't understand how to invest for retirement anyway and is not qualified to give comments that might 'educate' the people he runs into in a bad way.

The banks -who we know don't really offer competitive investment products - will be using their marketing to tell people they should stuff their money into this account to save in cash for buying a house or plan a wedding or whatever other lifetime events are added, and collect lots of free money from the government, so that once your housebuying is done, you can use the surplus or new contributions to get free bonus money for your retirement. Sounds great. And they will mention that you can get your cash back with a small penalty if you need it, and if you think you might need it you shouldn't be in investments you should be in cash, so it is fine to stick with their cash-based product all the way to age 60, as part of your retirement planning. Expect them to de-emphasise the 'part of',

As a consequence there will be loads of people swayed by the marketing and signing up with the banks saving in cash for their retirement. Or pulling their money out before retirement for that house upgrade or new car and not having any retirement money left. These are poor outcomes.

Meanwhile the providers who are in the investments side of the fence will be saying, hey look at this amazing investment product, like a regular S&S ISA except with free government money, you'll get bonuses on your contributions which can be used to buy a house or a wedding or whatever, and you can keep using it all the way to age 60 for your retirement. That sounds great too. So there will be people using S&S investments to save three to five years to buy a house or pay for a wedding, which doesn't sound sensible at all - but the investment firms that want you to buy their investments will not actively give you advice to say "ah, if that's your goal, you should go with a building society instead and keep it as cash". And you will get people using the account for investments to age 60 because of the 'free government money', perhaps forgoing the chance to make investments with an employer contribution and 40% tax relief that's able to be drawn out pre-retirement at age 57.

So the marketing from both the banks and the investment firms will lead to some sub-optimal outcomes, because neither of them, nor the tabloids, or the bloke down the pub, or the work colleagues at the coffee machine, or the parents at the school gates, are in the business of giving high quality financial education on how best to use the product. The product according to Ed-1 is pretty simple (because he is smart); but the product according to Dunstonh is complex (because he is also smart but has met lots of customers who are not at all financially savvy and would find the choices complex).

At the moment we have cash ISAs for short term tax protected savings, and we have HTB cash ISAs for smaller amounts of short term tax protected savings which will get a boost for first time buyers. And we have investment ISAs for medium to long term tax protected investments (including for retirement) and we have pensions for long term tax protected investments with initial income tax relief and partially taxable later.

That's a lot of products and if you are not financially minded you might not know what product to get. but someone can generally explain that if you have this goal consider using a combination of these products.

The problem is that now this new product is coming along it will be marketed as all things to all people, cutting through the 'mess' of different horses for different courses. If you are under 40 and qualify why not get one, there is bonus money on offer, and "hey it must be good to grab it because they are limiting it and not offering it to the over-40s". So, you get one.

But unlike the existing situation where you decided what you wanted to do and then opened one of four different accounts (and maybe opened all four accounts for your four different goals), with this one, you are opening the account and then deciding how to use it with perhaps several virtual 'pots' co-mingled within the £4k a year that you pay in. If you haven't made the decision up front of how much to put away for each purpose, and what cash option or investment fund(s) you are going to use for each goal, you will get into a pickle.

Obviously not suggesting anyone here would get into a pickle, but the kind of people who don't hang out on savings and investment forums are more likely to have trouble than we are.

Any new government scheme should be on message with 'tax simplification' and I suppose one product with one set of rules and suitability for multiple purposes, is on message. However, it should also be suitable for the 'lowest common denominator' in terms of it being something taken up by the mass market, some of whom might need protecting from themselves. While I abhor handholding and molly-coddling and restrictions, and love being given new flexible choices, I can see that this product could very easily cause problems.

jimjames

The difficulty is that all these features of something available to complement a pension already exist, namely a S&S ISA which has far more flexibility. Education is the key but that seems unlikely to be something that will happen.

Mogley

If you are willing to forgo the flexibility of a S&S ISA then you get a 25% bonus each year which is not taxed on withdrawal at age 60 which is an advantage over a basic rate contribution pension and the basic S&S ISA.

For me, the LISA product is a clever way for the government to generate short term cash flow advantages from the less financially savvy if used in place of additional savings in a pension.

Generally people invest in pensions monthly and the government tops up the pension at the same time you invest. For the LISA, they have now shifted this contribution to yearly thus improving their cash flow. Because you don't get the government contribution as quickly with the LISA compared to the pension, you lose out on the growth you could have achieved from each monthly government contribution.