We have other tax-free options – the Help to Buy Isa, occupational and personal pensions – designed specifically for each of those goals.
The Lifetime Isa (Lisa) has been surrounded by controversy ever since its adoption in April 2017. It’s the seventh member of the Isa family, and one that appears to have been set up specifically to squabble not only with at least one of its siblings, but also with its pension cousins just down the road.
It has not been a popular youngster among providers. Only a handful had climbed on the bandwagon after the first year, and even now, 18 months after launch, there are just 10 on the market. Now the Treasury Select Committee (TSC), in its recent report on household finances, is recommending, very sensibly, that the Lisa should be abolished altogether for a number of reasons, which between them raise the question of why such a financial changeling was ever brought into the world in the first place.
Far too complicated
The Lisa is simply too clever for its own good. Isas were supposed to help keep saving and investment simple, remember? Yet this one was designed as a solution to help young people save for a first home and also to encourage saving for retirement. Both are laudable ambitions – but cramming the two into a single savings pot makes for an unnecessarily complicated set of rules, hedged about by draconian penalties for those who make a misjudgement.
Moreover, we have other tax-free options – the Help to Buy Isa, occupational and personal pensions – designed specifically for each of those goals. Why muddy the waters by adding confusing alternative choices?
That is a particular issue for retirement saving, as in most cases a workplace pension will be a better bet than a Lisa. Ros Altmann, former pensions minister and columnist in these pages, warns that employees who opt out of their employer’s scheme in favour of a Lisa ‘will usually be giving up an employer pension contribution, may lose higher-rate tax relief and possibly lose National Insurance relief too. This would make them worse off in retirement than if they had put their money into a pension.’
Meanwhile, the government has been patting itself on the back over the success story of auto-enrolment. The scheme has been particularly successful at ensuring the young and lower-paid workers are making some pension provision, with almost 63 per cent of those aged 22-29 paying into a pension in 2017 – up from just 16 per cent in 2012. Yet that cohort is among the groups potentially most susceptible to the charms of the Lisa, as they contemplate how to get a first hold on the housing ladder. (The other groups, of course, include wealthy investors who have already used up their £40,000 annual or £1 million pension allowances and really don’t need yet another generous tax break.)
Given the Lisa’s toxic combination of complexity, potential pension allure and heavy penalties for getting it wrong, there’s a real risk that people will make poor decisions that could leave them less well-off in the future. Altmann flags up the ‘huge mis-selling risks’ attached to the Lisa.
The bottom line is that retirement provision should be kept separate from other, shorter-term savings pots, and that we’ve got a system that works reasonably well already in place. The pension freedoms of April 2015 have provided more flexibility when people come to access their investments, which is where it is valuable; but the beauty of successful pension saving is that it just chugs along in the background, building up over the very long term and not being dipped into on the way. Flexibility doesn’t really come into the picture in such a scenario.
Case for simplicity
However, there does remain merit in an incentivised scheme to help people scramble onto the housing ladder. The less generous Help to Buy Isa will stop being available to new investors in December 2019. Surely there’s an argument that the Lifetime Isa could be usefully repurposed and phased in at that point as a new-look, more flexible replacement for first-time buyers?
While there may be merit on paper in the idea that people can have flexibility in their savings goals, the fact is that too much choice can lead to confusion, and confusion in turn leads to poor decisions. The TSC is right to recommend simplifying the Isa landscape.
LISAS IN A NUTSHELL
• Available to those aged 18-40. Investors can put up to £4,000 a year into an account but must stop contributing at age 50.
• The government adds a 25 per cent bonus, paid monthly, amounting to a maximum £32,000 over the 22 years of contributions.
• Growth and withdrawals are tax-free.
• Can be used exclusively to buy a first home worth less than £450,000, or withdrawn for any purpose after age 60.
• Withdrawals made for any reason other than terminal illness incur a 25 per cent penalty, amounting to the loss of the government bonus plus around 6 per cent of initial capital.