While the original intentions behind the design of the Lifetime Isa in 2014 were understandable, as its launch date nears, it is set to confuse the savings landscape and go against what it was initially crafted for.
In his proposal, Michael Johnson said he created the Lisa because “under-35s are so disengaged from private pensions”. He went on to say that the “Lifetime Isa would be a savings chameleon: incorporating both Isa-like and pension-like features”.
However, far from being a chameleon, blending seamlessly in with its background, the Lisa sticks out drastically from its surroundings. The Financial Conduct Authority recently set out guidelines for how the Lifetime Isa should be sold and communicated. The FCA made it clear that investors need to be warned about the product, which it describes as “sufficiently novel”.
What we have is a product that, rather than helping younger generations save for retirement, could lead to more under-saving. Consumers, attracted by the 25 per cent government bonus, could end up choosing the Lisa over other retirement options that could be better suited to their needs.
Auto-enrolment has increased pension saving by £2.5bn per year, according to research from the Institute for Fiscal Studies. The Lisa will have a detrimental impact on this success story.
The product has a hefty 25 per cent early withdrawal fee, which is supposed to be an incentive to use the product for its original intention – to buy a first home or save for retirement. However, while it may be aiming for the right behaviours, it ends up damaging the Isa brand which has been so popular because of its simplicity and straightforward objectives.
The problem is the Lisa does not address the reasons behind why Generations X and Y struggle to save for retirement.
A recent survey from Old Mutual Wealth of 3,000 adults aged 30-45 found that 90 per cent have not started planning how they will fund their retirement. When asked why they aren’t saving at the moment, 79 per cent said it was because they couldn’t afford it. Only 3 per cent claimed it had to do with the savings and investment market and the products available. Similarly, when they were asked what would encourage them to save more, 69 per cent said it was if they had more disposable income.
Younger people aren’t saving for retirement and that is concerning, but the Lisa isn’t going to fix that. Johnson may have wanted it to promote a “lifetime savings agenda”, which could be used from “cradle to grave”, but that’s not how the market is taking it and its introduction into the savings world doesn’t deal with the crux of the nation’s savings dilemma.
Given the Lisa is still being drafted just months before implementation in April 2017, it would be sensible to pause and have a rethink. In his Autumn Statement today, the chancellor has the opportunity to embrace the more considered tone the Theresa May government has set and return to a longer-term, strategic approach to long-term savings policy.
A move towards certainty and simplicity to help people make decisions with confidence and to rebuild trust in long-term savings would be welcome.