Scrapping the Lifetime ISA risks millennial backlash

The Government would risk a backlash from younger voters if it caves to pressure to scrap the Lifetime ISA (LISA), AJ Bell warns.
16 August 2018

A recent report into household finances by the Treasury Committee was scathing in its assessment of the LISA – a product created in 2016 to help young people save for a first home or retirement.

The Committee specifically criticised the LISA for being unpopular, too complex, having “perverse incentives” and not complementing traditional pensions.

Tom Selby, senior analyst at AJ Bell, says: “The Government will cause uproar among younger voters if it caves in to pressure to scrap the Lifetime ISA. The product has been a hit with consumers so far and it would be ludicrous to pull the rug from under people now.

“Nobody is claiming the LISA is perfect, and policymakers need to look at ways to make the transfer process easier to navigate. The 25% exit penalty also remains a bone of contention and should be reduced so as not to excessively penalise savers.

“But ditching the LISA now would make little sense and risks leaving hundreds of thousands of people who have already invested stuck in limbo.”

The Treasury Committee’s LISA criticisms addressed

1.     Unpopular

“The idea the LISA is unpopular is slightly bizarre. We reckon across the market around 200,000 LISAs have been opened since April 2016 – and that’s with a limited number of providers offering the product.

“As the Help to Buy ISA is phased out we expect the market to expand, providing greater levels of competition and choice for savers.”

2.     Too complex

“The LISA is no more complicated than a pension. In fact, because the bonus is the same for everyone you could argue the structure is easier to explain. To demonstrate just how simple the LISA is, here’s all you need to know in 125 words.

“The LISA is only available to savers aged 18 – 39, so if you’re 40 or over you can’t apply. You can save up to £4,000 a year in a LISA and the Government will top it up by 25%.

“Provided you open a LISA before your 40th birthday you can keep contributing – and receiving the 25% bonus – until your 50th birthday.

“You can then withdraw the money tax-free to put towards your first home (provided it is worth £450,000 or less), if you’re 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 – likely to be more than the Government bonus if your fund has enjoyed investment growth.”

3.     Perverse incentives

“This criticism seems to primarily relate to the fact withdrawals are tax-free from age 60. Because of this, some commentators argue people will spend their fund far too quickly and face penury in retirement.

“Such concerns are out of step in a world of pension freedoms. Those reforms were based on the idea that people who have saved diligently for decades should be trusted to spend their retirement pot wisely.

“Given that the pension tax system is poorly understood, it is also a bit odd to argue this will have any material impact on the retirement spending decisions people make.”

4.     Doesn’t complement traditional pensions

“The claim LISAs don’t complement pensions lacks any real justification. In fact, for many having a LISA pot to spend before accessing their pension will make perfect sense as it allows their pension more time to grow.

“Furthermore, to-date we have seen no evidence of people opting out of auto-enrolment to save in a LISA, meaning for most the LISA will be an additional savings vehicle alongside their pension.

“We also need to remember that for some people – particularly the self-employed and basic-rate taxpayers – the deal on offer from a LISA can be more attractive than a personal pension. This is all about personal choice and preferences, and there is no reason why both products cannot co-exist.”

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