The Financial Conduct Authority (FCA) has outlined its proposed approach to regulating the promotion and distribution of the Lifetime Isa (Lisa).
Firms will be required to give specific risk warnings at the point of sale, including flagging to consumers the importance of ensuring an appropriate mix of assets is held in the Lisa. Providers will also have to spell out the early withdrawal charge, as well as any other charges.
The FCA is proposing to regulate the Lisa in the same way as other Isa products, with some additional protections designed to reflect the dual purpose of the new Isa and restrictions placed on accessing funds.
The introduction of the Lisa was announced in the 2016 Budget and the government intends for it to be available from April 2017. The Lisa is designed to allow people under the age of 40 to save or invest flexibly to either provide a deposit for a first home or save for retirement.The regulator also waded into the debate as to whether the Lisa should be used as pension saving product at the expense of a workplace pension. The FCA said the risks of losing out on an employer's pension contribution should be made clear by providers who offer the Lifetime Isa.
Risks relate to access, tax and exit charges
Another risk attached to the Lisa is that investors may fail to upscale 'other' savings upon reaching 50, when they cannot make any further contributions to a Lisa, the FCA notes.
The regulator has also proposed that providers offer a 30-day cancellation period after selling the Lisa.
On the issue of access, the FCA points out that investors may not realise that, while they will be able to withdraw all of their funds from a Lisa when they reach 60, they will be able to access funds accumulated in a personal pension at 58.
While, in relation to tax, the FCA wants providers to inform consumers that they may not be optimising their retirement savings from a tax perspective if they choose to invest in a Lisa rather than a pension.
Commenting on the FCA's proposed approach, Jon Greer, pension expert at Old Mutual Wealth, argues that while the Lisa's exit charge “may be aiming to drive the right behaviours” it makes the product complicated and damages the Isa brand.
He adds the Lisa also “appears muddled alongside the government's successful auto-enrolment strategy”.
Richard Parkin, head of pension policy at Fidelity International, says that as well as explaining when the charge will apply firms should also make it crystal clear exactly how much will be taken.
He says the effective penalty is in fact 6.25%, rather than the 5% that has been widely publicised.
He gives the example of an individual who invests £800, so receives a £200 government bonus. Early withdrawal will generate a charge of 25% of £1,000 leaving the individual with £750. This means a £50 loss on their original investment of £800, which is an effective penalty of 6.25%.
Parkin says it is important customers don't see the penalty as a provider charge or exit fee. It might be better to call it an “exit tax”, he says, in order to make it clear that is the government that benefits.
“We understand government's desire to discourage early withdrawals but we remain unconvinced that the penalty is necessary.”
This story was originally written for our sister magazine, Money Observer.