The much-maligned Lifetime Isa has come in for significant criticism in recent months. Now, one of the largest providers of the product has stepped in to have its say on how it should be fixed.
Fintech investment app Moneybox has jumped up the Lifetime Isa (Lisa) tables to become the third largest provider of the tax-efficient savings product.
In July, the Parliamentary Treasury Committee criticized the Lifetime Isa as ‘complex and inconsistent’ and called for its abolition. But the product continues to grow, with Nottingham Building Society the second provider to offer a cash version launching its own product in August.
Ahead of the looming Autumn Budget in November (as of yet with no fixed date) Moneybox has told Moneywise it has been in conversation with HM Treasury over ways to improve the product.
Moneybox says it believes the Lifetime Isa is a “good product” that could be better. Here’s what the company has recommended to the Treasury:
1. Banish the withdrawal penalty
Currently if you pay £100 into a Lisa you get a 25% bonus from the government. This means if you save the maximum each year of £4,000 you'll receive a £1,000 bonus every year. However, if you decide to withdraw the money and not use it for a house deposit or retirement, you are subject to a 25% withdrawal penalty on the entire amount. This means that instead of getting your £100 back, you’d be penalised for 25% of £125 - an effective penalty of £6.25 for every £100 saved.
Moneybox says this should be changed as it does not reflect the needs of savers to access their cash. The firm suggests allowing penalty-free withdrawals for events such as the birth of a child or other situations in which someone might need the cash, that isn’t to buy a house or for retirement.
This would in effect mimic other cash savings products such as limited access savers or single access savers that discourage withdrawal but allow limited amounts of access.
However, it would make the Lifetime Isa less like other products designed for long-term savings such as pensions, which ensure that holders have the money available for retirement by locking it up until a minimum age of 55. It could lead to shorter term financial planning - however it could be argued that this is necessary for some savers with more immediate needs for cash.
2. Index link the house price cap
Currently, the Lisa has a cap on the value of property it can be used towards of £450,000. With an average house price of £420,000 being paid by first-time buyers in London, it wouldn’t require a monumental rise in house prices for the product to become useless for many saving to buy in the capital.
Instead, Moneybox says the cap should be linked to a house price index, moving up (or down) with the market. Lisa savers could otherwise find themselves trapped with money in a product that can no longer be used to purchase their first home.
3. Include the Lisa in auto enrolment
Moneybox would like to see the Lisa made an option for employees in workplace savings schemes. It could then draw some or all of the benefit of employer contributions, and create another option for savers looking to prioritise a house purchase over retirement savings.
Moneybox believes this would increase engagement with auto enrolment and the Lisa as many young people prioritise saving for a new home over retirement. The benefit of the Lisa is that it could do both.
The firm stresses this is a longer-term aim for the product. It is similar to ideas mooted by think tanks such as the Centre for Policy Studies which called for the abolition of tax relief on pensions and replacement with a more positive bonus incentive.
However, combined with point one, the temptation for savers to pull their money out of a retirement-focused product could be a problem. Withdrawal penalties on pensions are specifically designed to prevent this type of behaviour.
The Lifetime Isa’s big problem is a lack of awareness
Patrick Connolly, a chartered financial planner at Chase de Vere says of the Moneybox recommendations that in fact the Lifetime Isa’s biggest issue isn’t technicalities but a lack of awareness.
He says: “The ideas suggested by Moneybox are reasonable, but in the overall scheme of things changing the withdrawal penalties or index-linked the maximum property values would make very little difference.
“However, the idea of linking the Lifetime Isa to auto enrolment is interesting as it could help raise awareness of the Lisa.
“This is the big issue with Lifetime Isas. They haven’t been heavily promoted and many younger people are unaware of the benefits they provide.
“Too many people are still saving for mortgage deposits using savings accounts or Cash or Stocks or Shares Isas.
“The Lifetime Isa is a good product and will often be a superior choice but this message is simply not getting through.”