New Lifetime ISA study calms auto-enrolment opt-out fears but exit penalty creates confusion

Tom Selby
21 November 2018

•    Survey of 400 Lifetime ISA (LISA) customers* reveals more than half (56%) are using the product for retirement, while about a third (32%) are saving for their first home
•    Fears the LISA could cause a surge in auto-enrolment opt-outs appear misplaced, with the vast majority (78%) saving in the product alongside their workplace pension
•    Just 3% of those not saving in a workplace pension said they had opted-out to fund their LISA
•    More than 9 in 10 customers were aware of the £4,000 annual contribution limit and the 25% bonus
•    Unsurprisingly the Government exit penalty caused the most confusion, with 1 in 5 unable to explain how the charge works


Tom Selby, senior analyst at AJ Bell, comments: 

“UK savers have clearly taken to the Lifetime ISA, with 166,000 accounts opened in the product’s first year. That is a promising number given the product is new and a relatively small number of providers currently offer it.  

“Encouragingly, fears savers would opt-out of auto-enrolment in their droves in order to fund their LISA appear to have been misplaced. Around 4 in 5 LISA savers are contributing to a workplace pension and a LISA, while just a handful have chosen to quit their workplace scheme.

“Rather than sowing the seeds of auto-enrolment’s demise, the LISA is providing a valuable savings option alongside the flagship reforms. 

“The fact so many people are making an active decision to save in a LISA over-and-above the auto-enrolment minimum is hugely encouraging and makes a mockery of calls made in some quarters to scrap the product altogether.

“The LISA is not perfect, however, and one problem area the Government must now address is the exit penalty. 

“It was clear from the start this risked creating confusion and this has been borne out in the research, with 1 in 5 respondents unable to explain how the 25% early withdrawal charge works. 

“With the LISA approaching its second birthday now is the time to revisit the mechanics of the product. Scrapping the exit penalty would be a sensible place to start.  At the very least the exit penalty should be reduced to 20% so that it equals the value the Government bonus adds to contributions and covers investment growth achieved on the bonus.”

*Based on survey responses from 400 AJ Bell Youinvest LISA customers  


How the LISA works:

•    The Lifetime ISA is only available to savers aged 18-39, so anyone aged 40 or over cannot apply
•    You can save up to £4,000 a year in a lifetime ISA and the government will top it up by 25%, up to a maximum of £1,000
•    Provided you open a lifetime ISA before your 40th birthday, you can keep contributing and receiving the 25% bonus until your 50th birthday
•    The funds can then be withdrawn tax-free to put towards a first home (provided it is worth £450,000 or less). They can also be withdrawn if you are aged 60 or over, or if you become terminally ill
•    In all other circumstances the government will levy a 25% charge on the money you take out: this is higher than the 25% Government bonus which only equates to 20% of the value of contributions made to a LISA.

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