The government is making up the rules on the Lifetime ISA (LISA) as it goes along, according to Royal London director of policy Steve Webb.
The former pension minister said the Treasury’s announcement on 13 December that the LISA’s exit charge would be dropped in its first year (2017/18) was a further sign the product had not been properly thought through.
Webb (pictured) added: “The new product, which is a complex hybrid between a pension and an ISA, is due to be implemented in just a few months’ time, and yet the government is still making up the rules as it goes along.”
He warned that having one set of rules on withdrawals for the coming year, then also switching from annual government top-ups that year to monthly ones in 2018/19, would only add more confusion.
Webb therefore argued it was “not too late” for the government to admit the risk the LISA could undermine the progress made in getting young people to save into a workplace pension under auto-enrolment and “reconsider the whole project”.
“At the very least, the government should hold off launching the LISA until the process of automatic enrolment is complete and every employee has access to a good workplace pension,” he said.
The government made the decision to scrap the withdrawal penalty charge on 13 December, for savers exiting the scheme in its first year.
Due to be implemented in a few months’ time, the LISA is intended to help young people save for their first house or towards retirement. It will allow savers between 18 and 40 to open an account, saving up to £4,000 a year until age 50 and only enabling them to access their money for the two specified purposes. Savers will be incentivised with a 25% government bonus.
‘Simple Tidying Up’Describing the decision on the exit charge as a “welcome clarification” from the government, Nucleus product technical manager Rachel Vahey nevertheless warned: “This is a simple tidying up of administration, not an easing of policy.”
She added: “Instead, in the future many people will be left in the position of facing a 6.25% charge on their contributions if they decide – either through choice or necessity – to take their funds early. Lisa is being positioned as an Isa and, as such, should offer investors flexibility. We do not believe such a high withdrawal charge is warranted.”