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LISA (Lifetime ISA) – mixed opinions on product value

The Lifetime ISA or LISA is due to be launched in April 2017 but is already getting a mix of coverage within the media.

The LISA is intended to encourage younger people to save; either to buy a home or for their retirement. Savings are heavily supported by contributions by the government and there is functionality not present in a pension to allow the saver to withdraw savings to buy a first home.

Opening a LISA is restricted to people aged 18 – 39. Contributions of up to £4000 per year will attract a 25% bonus top-up from the government. Withdrawal can be made at any time to support a home purchase or from age 60 to support your retirement.

What could be wrong with that?

  • Financial product providers have recently stated that products may not be ready for launch as they are still waiting for the detailed rules that they will need to build into the product. Their concern is that this detail may not be available until early 2017.
  • Steve Webb, former pensions minister, questioned who would use it. The over-40’s cannot open a LISA, you can’t fund it beyond age 50 and can’t use it for retirement before age 60 without penalty.

The bonus for savers looks attractive but how many young people renting can afford to save £4000 a year?

  • Baroness Ros Altmann was even more scathing. She warned that the LISA isn’t even close to being as beneficial as a pension.

Anyone withdrawing money from a LISA before they are 60, other than to buy a first home, will lose the 25% bonus AND pay a 5% penalty on the withdrawal. This level of penalty will remove much of the perceived flexibility.

  • HOWEVER, recent research by Capita showed that over a third (34%) of employees aged between 16 and 34 would rather use an ISA to save for retirement than a pension.

As this group is close to the target market for the LISA, it may yet be well received.

 

Pensions have their own distinct benefits, covered in different blogs. If you’re trying to decide between a pension and a Lifetime ISA, it is a complicated issue. Rather than gamble on your future, seek expert advice.