The New Lifetime ISA – Dangerously Overhyped?



Posted on: 11th April 2017

The government might be showing it all the support in the world, but there are those who believe that the new Lifetime ISA is in fact a completely overhyped product. In fact, there are many within the IFA community who have labelled it a dangerous product that will leave the vast majority of people worse-off, should they decide to go ahead with one.

As it stands, we’re just a couple of weeks into the new scheme and it is already looking like a bit of a washout. The controversial account type has been picked up by one major name only – Skipton – amidst claims by many others that the accounts are being mis-advertised and potential customers misled.

Some of the biggest names on the market, including Nationwide, have already confirmed they won’t be offering it, due to the fact that it is far too complicated and rarely proves beneficial. But given the fact that the government seems to be all-for the idea, what is it about the LISA product that makes it such a controversial topic?

Well, the first and most important point is that which centres on one of the most basic and important rules from the collective ISA community. Which is that to mix savings for your pension and for a house deposit is usually a very bad idea. These are two completely independent savings goals and should not be brought together as one, which is pretty much what the new LISA product does.

Many experts have lashed out at the scheme, stating that it is likely to lead to many people approaching retirement with not nearly enough put away to fund the years to follow.

“It is a dangerous product that could mislead people into buying something that is not right for them,” Former pensions minister Ros Altmann said.

“It is too complicated and there is a huge penalty if you take cash out too early –making it unsuitable for anyone who is saving with the idea of getting their money out at some stage.”

While the apparent offer of a 25% annual top-up from the government seems like an offer too good to pass up, it’s every bit a deal that’s too good to be true. What’s handed out with one hand is taken away with the other, in the form of harsh exit penalties if the cash is accessed before turning 60, unless it is to fund a home purchase or following the diagnosis of a terminal illness.

“The 25% bonus on the LISA works out exactly the same as the 20% tax relief people receive on pension savings,” Altmann added.

“But this generous boost to savings and the greater flexibility of the LISA could mean a big risk of younger people opting out of automatic enrolment workplace pensions, and missing out on contributions from their employer,”

“The basic message is this: if whoever is selling a lifetime ISA has not made sure you don’t have a better option of saving into a pension, you are in danger of mis-buying. And the seller is in danger of mis-selling,”

“Almost anyone will be better off in a pension – except those with rich grandparents who can afford to put away £4,000 a year so their grandchildren can gain the generous government bonus,”

“The LISA is a rich people’s gimmick. Is that really how the government should be spending money when they are making tax cuts elsewhere?”

If you want to fully understand your ISA options in more detail please contact us at Haven for a free review.

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