The LISA may have turned out to be more challenging than expected, says Adrian Boulding, but that just makes the financial services sector’s task of engaging and communicating with savers that much more important.
With four months to go until the launch of the Lifetime ISA (LISA), the Financial Conduct Authority (FCA) has just published draft changes to its rulebook to cover the selling of the new product in its Consultation Paper 16-32. In this 48-page humdinger, the regulator identifies 11 potential risks that purchasers of a LISA may be exposed to.
These risks fall into five key categories – complexity, contributions, investments, access and tax. The FCA intends to amend its handbook so that LISA sellers and providers must disclose these risk warnings to customers when they offer the product.
The regulator believes investors in LISAs should receive risk warnings in respect of two specifics – the first being incurring the early withdrawal charge, which may mean they receive less from their LISA than they paid in. The other is potentially losing an employer contribution to a workplace pension for which they may be eligible, where they choose to open a LISA instead of opting into an auto-enrolment workplace scheme when it is offered to them
But will a sheet of risk warnings be any more help than the neatly folded leaflet that comes with prescription medicines warning of potential side-effects? After all, most people only read these leaflets once they have felt some of those side-effects – when it may be too late. Looking at the different risks the FCA has identified, we can see we may need to deploy different customer engagement techniques to address different types of risks.
The early exit penalty can, for example, be addressed by using loss aversion as the driver. A clear statement that says if you invest £1,000 in a LISA in Year 1 and promptly change your mind, and seek to withdraw it all, you will lose £62.50, should frighten off anyone with cashflow difficulties who might need their money back quickly. We can use the natural human emotion that flows from fear of loss to discourage those who cannot commit to keeping their funds in a LISA – perhaps pushing them towards a more flexible alternative such as a cash ISA.
The FCA’s next big concern is that customers might choose LISAs over workplace pensions as their long-term savings vehicle of choice. Despite all the Treasury rhetoric that the LISA is not a competitor to pensions, it is squarely aimed at younger savers where auto-enrolment take-up has been particularly strong.
Recent research by the Institute of Fiscal Studies found auto-enrolment has increased pensions membership of eligible 20-somethings from 27% to 85%. The FCA worries the lure of the LISA’s early government-backed bonus might tempt younger employees to switch their regular savings from an AE pension to their LISA and consequently lose the all-important employer contribution associated with auto-enrolment pensions.
This time, we can use the human emotion of greed to deter people from switching long-term saving away from auto-enrolment and into a shiny new LISA. This could be a simple message to say there may be a better long-term savings vehicle for them than the LISA in the form of a pension, where their pot will grow twice as fast as a LISA as their employer will be paying in too.
But the FCA’s worries over investment strategy are much harder to engage customers on. The regulator has rightly pointed out the investments geared to supporting first home purchase in three or four years’ time are likely to be very different from those suitable for saving for retirement over a 30 or 40-year period (and designed to deliver retirement income over a further 20 to 30 years). This means the provider needs to keep up-to-date with the customer’s savings goals.
The customer’s investment strategy will need to change if they retain their LISA long after the window in which the provider would reasonably expect a first-time house purchaser to have bought (and cashed up his LISA). At this point, perhaps by age 40, the LISA holder’s investment strategy will need to be reviewed and possibly altered with a view to supporting their retirement plans (which is the next exit point aged 60).
Customers buy savings products for all sorts of reasons. Perhaps they liked the advertisement or their mate down the pub says he has one or they have a general sense they should be saving something or they have just read this new LISA is the latest government initiative for savers.
Convert generic enthusiasm for saving
We must help convert that generic enthusiasm for saving – to investing for the future with a view to reaching a well-defined goal. That means helping people to think ahead about what their real goals are and when they want to achieve them by. After all, we are not all like Michael Heseltine, who famously sketched out his life plan on the back of an envelope at Oxford and then achieved it all – apart from falling marginally short as deputy prime minister …
But stimulating people to do their financial planning, often without the assistance of an adviser, will require some highly imaginative and engaging communications solutions to tempt them into those introspective thoughts that can help us move from forming notional aims to defining clear financial goals.
The other thing to consider is that this engagement work cannot just be done at point of sale but through ongoing monitoring and regular updating of progress and goals over the 40-year plus duration of the LISA contract.
Predictably enough, this innovative offering designed to support young people in their quest to get on the housing ladder has turned out to be rather more complex and challenging than it sounded when George Osborne announced it in his 2016 Budget. But that just makes our task of engaging and communicating with savers that much more important – and it’s not one we should shy away from as an industry.
Adrian Boulding is retirement strategy director at Dunstan Thomas