Providers warn against extending Lifetime Isa to include loans
When announcing the launch of the Lifetime Isa in March's Budget, chancellor George Osborne said he would consider exploring whether flexibility should be introduced that would enable savers to borrow from their own fund.
Osborne said he would look at whether the Lifetime Isa should follow the model used in America's pension system, which allows savers to borrow up to 50% of their fund (up to a maximum of $50,000) and pay it back over a set period of time without incurring a penalty.
Richard Parkin, head of pensions at Fidelity International, has warned against such a move, on the grounds that it would create too much complexity. “We have to be very cautious about implementing a loan facility where there is no existing collection mechanism such as payroll deduction,” says Parkin.
“What would stop individuals from simply contributing then borrowing the money back and repaying through existing contributions? That does not seem like something that should be supported by the government subsidy.”
AJ Bell has urged the government to proceed with caution. The firm warned there is a risk savers tempted by the option of borrowing from their Lifetime Isa will regret any decision to opt out of auto-enrolment when they come to retire.
Tom Selby, senior analyst at AJ Bell, says: “While the majority of US savers who can borrow from their fund haven't drained their pots, about a fifth have loans outstanding, worth on average 11% of their total pot.
“These are not small numbers, especially when you consider the majority of the UK population is already failing to put enough aside for retirement.
“Any further reform must not overly complicate an already complex system, and should encourage people to save for their retirement.”
The new Isa, set to launch in April 2017, offers a bonus of 25%, for certain lifetime events. The bonus, which is capped at a maximum of £1,000 a year, can be utilised by first-time property buyers and those who use the Isa as a retirement savings vehicle. The government bonus also applies to terminal illnesses.
The government has also said it is open to the idea of adding further lifetime events to qualify for the bonus.
In light of this, TISA has launched a survey for people to vote on the three lifetime events they think the government should include.
The findings will be announced on 27 June and proposed to the Treasury for future implementation. If you're interested you can vote here.
This story was originally written for our sister magazine, Money Observer.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.