The Lifetime ISA has received a lot of criticism since it was first announced in the 2016 Budget. So, what’s wrong and how can the product be fixed?
The Lifetime ISA – or LISA – is a savings product that is meant to encourage us to save for both our first home and retirement.
Anyone aged between 18 and 40 can open a Cash or Stocks and Shares version and deposit up to £4,000 a year into it.
However much you put in, the Government will top it up with an extra 25% bonus (worth up to £1,000) every year until you are 50.
Like other ISAs the money you save is able to grow free from Income Tax and there’s no Capital Gains Tax to worry about.
But, at present a number of flaws with the LISA mean it may be doomed to fail.
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What’s the problem?
A new report by Scottish Friendly highlights five flaws that are preventing the LISA from working well for savers.
1. You don’t benefit from employer contributions
LISAs are designed to encourage people to save for retirement, but unlike pensions you won’t benefit from employer contributions if you put money in a LISA.
“The purpose of a LISA is to support younger people as they save for retirement and therefore it should have the same status in relation to employer contributions as pension products,” says Neil Lovatt, Scottish Friendly’s commercial director.
“Our research reveals that nearly half (47%) of people in full-time employment said they would be more likely to use the LISA if employer contributions were included.”
2. LISAs aren’t part of auto-enrolment
Scottish Friendly wants to see LISA products used as compliant auto-enrolment products.
So, people being auto-enrolled into their workplace pension scheme can choose to save into a pension or a LISA.
3. A LISA can affect your benefits
Savings held within a pension product are exempt from the capital rules used for means-tested benefits.
Scottish Friendly believe LISAs should hold the same status.
4. The age restrictions exclude people who need to save
There are plenty of people over 40 who need to be encouraged to save for their retirement.
So Scottish Friendly want the Government to remove the age cap on people being able to open a LISA.
It is also calling for the 25% bonus to be paid beyond a person’s 50th birthday to encourage more middle-aged people to save for retirement with a LISA.
5. The access age is later than with a pension
Save into a traditional pension and you can start accessing your cash and drawing a retirement income when you are 55. With a LISA you can’t access your money until you turn 60.
Scottish Friendly want to see the LISA access age brought forward to 55 so it is in line with pensions.
“The LISA could have a transformative impact on many people’s lives and help them to increase their savings and investments and achieve their financial goals,” concludes Lovatt.
“To help people realise these ambitions the Government and the industry needs to focus on the potential of the LISA and remove the barriers to increased competition and product flexibility in the pensions market.”
Is the Lifetime ISA worth going for?
“There is no disputing that the Lifetime ISA has the potential to address the issue of record low savings levels among British households and, in particular, young people,” says Lovatt.
“The majority know they are not saving enough for retirement or are not confident they are doing so. Our findings indicate the complexity and negative brand of pension products is acting as a deterrent and there is a need for an alternative solution.”
“Despite the popularity of the ISA structure with savers and investors there is clearly more work to be done on the LISA.”
“It is by no means the finished article. There are a number of considerations the Government must make before refining it to ensure it becomes the savings and investment product that people desperately need.”
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