Six ways to ‘correct the flaws’ of the LISA

Hannah Godfrey writes

There are a number of flaws in the way the Lifetime ISA (LISA) is currently set up, Scottish Friendly has concluded in a new report. Here the firm outlines six steps the government should take to enhance the product and help it achieve its full potential

Scottish Friendly supports the LISA but in its new report ‘The Future of the Lifetime ISA’ it nevertheless identified a number of flaws in the current structure.

It said employees who put money aside for their retirement through a LISA are losing out on significant sums of employer contributions and could find their eligibility for means-tested benefits reduced in ways that would not occur if they saved through a traditional pension.

Additionally, Scottish Friendly warned of the risk of savers opting for more conservative investment strategies than is typically the case for an average pension fund, undermining their long-term returns.

The LISA first became available to investors on 6 April to coincide with the new tax year. It allows those aged between 18 and 50 to save up to £4,000 a year towards a pension or a first home tax free, with the promise of a 25% government bonus capped at £1,000 a year.

However, withdrawal for any other purpose will trigger a 25% exit penalty levied by the government.

Scottish Friendly suggested the following six measures could help the product properly serve its dual purpose of helping young people to save for retirement or to buy their own home.

1 Employer contributions

Scottish Friendly said the government had to ensure those who save and invest through a LISA are just as able to benefit from employer contributions as those who invest through a traditional pension.

Former pensions minister Ros Altmann has also spoken extensively of her concerns that the birth of the LISA will lead to people missing out on pension benefits. In a Professional Adviser roundtable, she too warned that LISA savers miss out on free money from their employer they would otherwise benefit from in a traditional pension.

2 Auto-enrolment

LISA products should be permitted to be used as compliant auto-enrolment products, the financial friendly said.

Regulators should ensure there is a level playing field between pension products and LISAs, and that consumers who are automatically enrolled into a savings or investment product receive the same protection in relation to charges.

3 Means-tested benefits

LISA savings and investments should be exempt from the capital rules for means-tested benefits and supported in the same way money held in a pension product is, Scottish Friendly said.

Current capital rules mean that those with more than £16,000 of savings become ineligible to receive means-tested benefits such as universal credit. Pension savings are exempt from this means-test assessment, but LISA savings are included.

4 Age restrictions

Current age restrictions that apply to the LISA need to be removed so that people can open a product beyond the age of 40 and continue to save and invest into the product beyond the age of 50.

For example, the Taylor Review suggested the LISA would be good for incentivising the self-employed to save for a pension. However this is flawed logic as most self-employed people are over the age of 40 and therefore cannot access the product in its current form.

5 Withdrawal penalty

Contrary to popular opinion, Scottish Friendly advised the government to keep the withdrawal penalty and assess over time whether it needs to be higher.

Most in the industry however, have said the opposite and called for the exit penalty to be removed.

6 Pension access age

Last but not least, Scottish Friendly asked for the age at which LISA savers and investors can access their money for retirement purposes to be changed to 55, the same as pensions. Currently that age is set at 60.