The Financial Conduct Authority puts communication "front and centre" as part of proposals for Lifetime Isa sales

Oliver Gill
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The Lifetime ISA can be used to fund the purchase of a first property (Source: Getty)

Britain's financial watchdog has set out its expectations on the rules of engagement for next year's launch of the Lifetime Isa.

The Financial Conduct Authority (FCA) today issued a consultation paper that proposed financial advisers must warn investors of the key penalties and opportunity costs of using the savings wrapper.

Read more: Property or pensions? Why not both?

The Lifetime Isa initiative is intended to help adults under age 40 to save or invest flexibly to either buy a first home or put money aside for retirement. The particular attraction for many youngsters is that for every £4,000 put into a Lifetime Isa annually, the government will top it up with a further £1,000.

Financial advisers are anticipating a wave of applications for the new product that George Osborne announced in his Budget earlier this year.

Concerns have been raised whether the public realise the implications of an early withdrawal of savings. Not only do the government contributions need to be paid in full, but there is an additional five per cent exit fee levied. Another worry is that the product will be more appealing compared with saving through a workplace pension, creating an "either, or" situation.

Read more: The Lifetime ISA is as good as useless for Londoners

Nevertheless, experts have welcomed the FCA proposals as a way to address these concerns.

“It’s good to see that providers selling Lifetime Isas will have to warn buyers that they will risk losing out on employer contributions if they switch out of a pension," said Paul Waters, head of guided outcomes at Hymans Robertson.

Tom Selby of AJ Bell agreed that "communication must be front and centre... a fact the FCA has rightly acknowledged" but stressed the need to explain what investors could be missing on in terms of saving via a workplace pension.

"A contribution matched by your employer is effectively a guaranteed bonus of 100 per cent. Investors will also need to think carefully about their investment strategy depending on whether their objective is buying a house or saving for retirement."

Read more: Lifetime Isa on a "collision course" with auto-enrolment

However, Waters said he didn't see saving via a Lifetime Isa and a workplace pension as mutually exclusive. "The numbers that actually plan to switch from pensions to Lifetime Isas are smaller than many anticipated, " he said.

Not all experts shared the positive sentiment. Old Mutual's Jon Greer said that although the greater communication advocated by the FCA was welcome, "that doesn’t get the crux of the problem. The Lifetime Isa needs a rethink".

Greer added that the FCA paper made a reference to personal pensions being accessed at 58 rather than 55. He added: "This potentially shows the likely direction of what the government will announce from the State Pension Age review."

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