The UK government’s plans for a lifetime Isa are mired in controversy after new details emerged of punitive and confusing charges on the product.
The lifetime Isa (Lisa) is set to launch next April, but criticism is mounting as both providers and consumer groups raise questions over early withdrawal charges that experts say are unfair and misleading.
The scheme will allow anyone aged between 18 and 40 to save up to £4,000 a year into the account, with the Government paying an annual bonus of 25 per cent up to the age of 50.
The savings can either be used towards retirement or for a deposit on a first home worth up to £450,000. If it’s the latter, the money can be taken out at any point, including the bonus, provided the account has been open at least a year.
If the product is being used for retirement the saver will be allowed to take the proceeds tax-free after their 60th birthday.
The industry has been given just months to develop the product – and there’s very little appetite for meeting the April launch date, with Standard Life, Lloyds Banking Group, HSBC and Nationwide Building Society among the big players to have said they are unlikely to do so.
Firms are privately uneasy about the elements of the product design, including the charges, while there are concerns that the Lisa will undermine pensions and potentially spell the end of the existing system of pensions tax relief.
The Savings Bill, published on Wednesday, outlined details of the exit penalty on early withdrawal.
The only instances in which it won’t be levied is when the account is used to buy a home worth less than £450,000, when the investor is aged 60 or over or if the individual becomes terminally ill.
Where it does apply, however, it could take a big chunk out of the investment.
But the devil is in the detail. The exit penalty of 25 per cent of the withdrawal includes the government bonus element, any interest or growth on that bonus and a “small additional charge”.
“On the face of it this sounds equitable: a 25 per cent bonus in and a 25 per cent charge for cashing in early. But it isn’t,” said Rachel Vahey, product technical manager at Nucleus Financial in Edinburgh.
“The withdrawal charge really equates to clawing back the bonus plus an additional five per cent charge – and that’s five per cent of money invested plus investment growth on that money as well,”
For example, say you invest the annual maximum of £4,000, topped up to £5,000 by the government bonus. If there’s no investment growth, the 25 per cent charge on early withdrawal amounts to £1,250, which is made up of the government bonus and a 5 per cent charge on the whole pot.
But what happens if you factor in some investment growth? If £4,000 is invested annually over ten years, the government bonus makes it a total of £50,000.
If that £50,000 grows in value by four per cent net a year, it would be worth £62,432 after that ten years. If it’s taken early the 25 per cent exit charge would be £15,608, which means the government gets back not only its £10,000 contribution, but another £5,608 – almost half the investment growth.
“So, it’s a moveable feast,” said Vahey. “The better the investment growth or longer you have the investment, the higher the charge.”
Investors will likely see it as simply clawing back the government bonus, but as that clearly isn’t the case it could be seen as both confusing and unfair.
“It’s being set at a high level, and will make a big dent in people’s savings. It also seems extreme when compared with the proposed Financial Conduct Authority and Department of Work & Pensions cap of one per cent exit fees on pension plans, which is due to come in next year,” said Vahey.
“There may be good reasons for the consumer to take their cash early. But they must be aware of the charges involved and how this will reduce the money they expect to get back.”