The Treasury released final details last week on the Lifetime Isa (Lisa) which launches in spring 2017. Aimed at two very different types of savers – first-time buyers and retirees – the updates mostly concern the first group, and will do little to silence critics who say that the Lisa will lure away people who could generate more in a pension, and leave them worse off in their later years.
Welcome news for many first-time buyers
The announcements revealed that, for the 18-40 year-olds who are eligible to save into a Lisa, the effective 20 per cent government contribution will be paid on a monthly basis after April 2018. The value of this bonus (£1 for every £4 you put in) will be based on the amount you pay in each month – up to £4,000 a year – rather than the value of your pot, which may have risen or fallen since your contributions were made.
If you want to access Lisa savings to buy a property, the bonus will be made available when you exchange contracts, rather than when you complete, which distinguishes it from the Help to Buy Isa and means that cash flow is maintained when it’s most needed.
As it stands, if you want to access Lisa savings for any purpose other than buying a first home (for no more £450,000) or once you reach 60, you will face a penalty of 25 per cent of your entire fund, including any investment growth.
When it was announced in the March Budget, the Lisa came under heavy fire from the pensions industry for its positioning as a poor alternative to a pension, and little has been done since to allay fears that people will miss out on the tax relief and valuable employer contributions they would enjoy if they put the same money in a pension.
It’s not a pension, it’s not a Help to Buy Isa – it doesn’t know what it is
As Fidelity’s Richard Parkin pointed out in May, matched employer contributions under the auto-enrolment scheme mean that saving into a workplace pension is always a better first option than saving into a Lisa. And higher rate taxpayers currently enjoy 40 per cent tax relief on pension contributions up to £40,000 a year. That’s double the bonus offered to Lisa savers on just £4,000 a year.
It is only if you save more of your salary into a pension than your employer has promised to match that the Lisa looks the better deal. That’s because its 20 per cent government bonus and tax-free withdrawals is more generous than being charged at your marginal rate of income tax on 75 per cent of your pension savings.
Even for many self-employed people who don’t have the benefit of employer contributions, the Lisa will be of limited use, says Steve Webb, director of policy at Royal London and former pensions minister. “It’s not a pension, it’s not a Help to Buy Isa – it doesn’t know what it is. The typical self-employed person in the UK is over 40, and they will be barred from taking one out,” he says. “And nobody can save into it after they’re 50.”
The Isa was originally designed to make saving simpler, and the Lisa’s encroachment on pension risks disincentivising already low levels of saving.
Webb points to survey evidence which now shows that, if people could only save in one place, many would choose a Lisa. And he worries that people might continue to use one over a workplace pension after they’ve bought a home. “Most Isas owned by young people are in cash... and Lisa-only savers might get in the habit of opting out of their workplace pension scheme every three years.”