The Lisa’s early withdrawal charge and its combination of elements of a short-to-medium-term deposit based savings product with a long-term retail investment product create risks to consumer protection, the FCA has said in a consultation published today.
The regulator has spelled out five areas of risk to consumers – complexity of product features, the risk of losing out on employer pension contributions, challenges on finding a suitable strategy for an investment horizon that could be short or could be long, a lack of understanding of the 5 per cent early withdrawal penalty and confusion around whether the Lisa is a more tax efficient solution than a pension.
The regulator says specific point of sale warnings on early withdrawal penalties, the risk of missing out on employer pension contributions and the importance of ensuring an appropriate mix of assets will be required by providers offering Lifetime Isas from April 2017, under proposed rules published by the FCA today.
But the FCA says it is not reasonable to forecast what effect the availability of the will have on opt-out rates, both at enrolment and re-enrolment, or on the rate at which people cease to be members of a scheme, because the product is new.
Firms will be required to remind consumers of the early withdrawal charge and any other charges and will have to offer a 30-day cancellation period after selling the Lisa, under the proposals.
The FCA says it will regulate the Lisa in the same way as other Isa products, with additional protections designed to reflect the dual purpose of a Lisa and the restrictions on accessing funds. Cash-only Lisas may escape these more onerous regulations.
The regulator is also proposing that investors be given an indication of what they might get back from a Lisa at age 60 via a table to be included in the current point-of-sale disclosures. The purpose of this table is to highlight the difference in outcome for different investment or saving returns. It will show how long-term savings can be eroded by inflation; this is intended to encourage investors to consider the investment options in line with their objectives and investment timescales. The table will also give information on charges of the LISA wrapper – intended to help investors compare different Lisas and allow them to make a comparison with charges on personal pensions.
Old Mutual Wealth pension expert Jon Greer says: “The Lifetime Isa confuses the long term savings landscape and leaves young people uncertain about where to invest.
“However the view that the exit charge is at odds with the FCA’s charge cap is too simplistic. The exit penalties the FCA were concerned about were those levied by providers and schemes which influence a person’s ability to access pension freedoms. The penalty on the Lifetime Isa is an incentive to use the product for what it was intended for – a house purchase or to be accessed from age 60. The 25 per cent early withdrawal charge shares more in common with unauthorised payment tax charges that apply to pensions, rather than the FCA/DWP charge cap.
“While the exit charge may be aiming to drive the right behaviours, it makes the product complicated and damages the Isa ‘brand’. The Lifetime Isa also appears muddled alongside the government’s successful auto-enrolment strategy.
“It is right that firms should have to remind consumers of the exit charge and any other charges, but that doesn’t get the crux of the problem. The Lifetime Isa needs a rethink.
“The paper introduces a ‘Cash Lisa’. This would potentially need additional consumer warnings as using cash-only for a retirement vehicle is highly unlikely to produce good outcomes over the long term.
“In its current guise, the Lifetime Isa will be used primarily to save towards a first home, very few people will use a Lifetime Isa to save for old-age and pensions are still the best retirement savings vehicle for the majority.
“It is interesting that the paper says personal pensions can be accessed from age 58 rather than age 55. This potentially shows the likely direction of what the government will announce from the State Pension Age review.”
Hargreaves Lansdown head of retirement policy Tom McPhail says: “Young investors looking to get on the property ladder and to save for their future will welcome the launch of the Lifetime Isa in April next year. Since the policy was announced, we have seen evidence of strong demand and enthusiasm for the unique combination of terms offered by the Lisa. Lisa providers such as Hargreaves Lansdown are already adept at helping savers and investors to make good decisions with their money. The FCA is clearly mindful of the importance of good, clear communication around the Lisa. The measures they have proposed here look sensible and are consistent with the types of financial education and communication we have been developing for Lisa investors ahead of launching in April next year.”
How the FCA sees the risks of the Lisa
Investors may not understand the purpose, features and restrictions of a LISA, as these are more complex than the existing cash ISA and stocks and shares ISAs.
Investors may not sufficiently understand the differences between the features of a pension and a LISA in order to make informed decisions about the benefits and risks of each for their own circumstances.
Investors may lose out on an employer’s pension contribution if they opt out of a workplace pension in favour of saving in an LISA.
Investors may fail to upscale ‘other’ savings upon reaching 50, when they cannot make any further contributions to a LISA.
Investors will need to make investment decisions in line with their objectives and the investment strategies are likely to need to be different for saving for a deposit for a first home and saving for retirement.
Investors may remain invested in an inappropriate asset mix – e.g. they originally intended to use the LISA to save for a deposit to buy a home and later decide to use it to provide retirement savings.
Investors may not realise that, while they will be able to withdraw all of their funds from a LISA when they reach 60, they will be able to access funds accumulated in a personal pension at 58.
Investors may not fully understand the impact of the early withdrawal charge and any additional charges that providers may levy.
Investors may not fully understand risks around any absence of Financial Services Compensation Scheme (FSCS) protection and limitations of client money rules.
Investors may not be able to compare the Government bonus with tax relief on pensions and higher rate taxpayers (with remaining available capacity for tax relief on pension contributions) may, therefore, not optimise their retirement savings from a tax perspective if they choose to invest in a LISA rather than a pension.
Investors may not understand the difference in how the proceeds of a LISA and a pension are taxed