'Mis-buying' warning over lifetime Isa

https://www.theguardian.com/money/2016/nov/14/mis-buying-warning-lifetime-isa-high-exit-penalties

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A new type of savings account aimed at under-40s and available from next spring could result in a “mis-buying” scandal, a former government minister has claimed.

The lifetime Isa (pdf), unveiled by George Osborne in the March budget, is a savings account that will allow people to save either towards their first home or their retirement. Those who sign up can save up to £4,000 a year and receive a government bonus of 25% – which means those who put in the maximum each year will receive a £1,000 bonus every 12 months from the government.

Individuals will be able to open a lifetime Isa from the age of 18 until they turn 40, but any withdrawals by those aged under 60 that are not for a first home will result in the loss of all the government bonuses, plus all the interest or growth on those bonuses. On top of that, a 5% penalty would also be applied.

On Wednesday 16 November the Financial Conduct Authority will announce a consultation on the rules it believes should apply to the new Isas. Ahead of that announcement, however, Steve Webb, a former pensions minister who is now director of policy at mutual insuer Royal London, has issued a warning: “There is a real risk of a ‘mis-buying’ scandal as the wrong people take out lifetime Isas.”

Webb said there should be a presumption against taking out a lifetime Isa for those people who are not taking full advantage of the matching workplace pension contributions on offer from their employer. He said that a worker who put £1 into one of the lifetime Isa accounts would receive 25p in top-up from the government compared with a £1 contribution from an employer who was prepared to “match” employee pension contributions.

Webb also said that ministers had suggested that the new Isas would be suitable for the self-employed because of the ability to withdraw cash, but he added: “The hefty exit penalty means self-employed people should not take out a lifetime Isa with a view to treating it like an easy-access savings account.

“[And] people who have already bought a house should think very carefully before opening a lifetime Isa as a ‘retirement-only’ product. With no contributions allowed after age 50, and a lock-in of cash until age 60, there are serious questions about the suitability of the lifetime Isa for this group.”

However, the Treasury said: “This government is absolutely committed to supporting people to save for their future. The lifetime Isa is a key part of this, which has been designed to complement, not replace, pensions.

“It is designed as a long-term savings product which allows flexibility for savers. The Treasury is responsible for policy on the lifetime Isa, along with all other Isas. We continue to work closely together with HMRC on its implementation.”