It’s pretty safe to say that the IFA community in general hasn’t responded particularly well to the announcement of the arrival of Lifetime ISAs (LISA), which formed a key part of George Osborne’s spring budget a few weeks ago. The concerns of a great manyproviders appear to be shared by the Association of British Insurers, which has also been rather vocal since last month’s budget.
Quite simply, the concern centres on the way in which the rollout of automatic enrolment could be seriously destabilised by an alternative pension system.
The UK’s official work andcommittee has expressed real concern with LISA, to such an extent that its ‘ automatic enrolment inquiry’ has been reopened, as a means by which to address a number of critical questions.
- To what extent is the LISA compatible with auto-enrolment and the government’s wider pension strategy?
- What impact could the introduction of the LISA have on opt-out rates?
- To what extent will the LISA fill the gap in savings among the self-employed?
- Are there more appropriate alternatives?
- Which groups would be better off saving into a LISA than they would be under auto-enrolment?
In terms of how it all works, LISA will go live as of April 6 next year, at which time anyone aged 18 to 40 will have the option of saving up to £4,000 a year, with the promise of a generous 25% bonus from the UK government on all savings stacked up when they turn 50-years-old. Which in turn means that if you were to save £4,000 each year, you would be given an extra £1,000 every year by the gov, which over time could turn out to be a huge sum of money.
In terms of accessing the cash, it’s supposed to be a scheme whereby the funds remain untouched until the individual is at least 60-years-old. After this time, it can be taken out with no tax payable. However, if the savings are accessed prior to turning 60, the bonus along with any added interests accrued on the bonus money is taken away.
Even worse, those who access their funds early will also be forced to pay a pretty mean spirited 5% penalty to the government from their own savings. It’s all a means by which to encourage savers to continue saving as long as possible toward their retirement, though in this instance is achieved by punishing those who stray.
The primary concern among the IFA community is the way in which it is all likely to create further confusion among younger and longer-term savers in particular, who may have no idea what represents the best option in accordance with their circumstances. And the way in which LISA may affect auto- enrolment also has much of the IFA community up in arms.
The long and short of it being that in the case of most savers across the UK, it will be a case of choosing either LISA or pension savings, as affording both at the same time will be an unrealistic prospect.