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The problem with the lifetime ISA
The government’s flagship saving scheme, the lifetime ISA (LISA), will be arriving soon and though it was initially met with praise it is now being heavily criticised for its potential consequences. Currently only one High Street name, Skipton, has announced that it will be offering the LISA from June this year.
It is thought that a handful of investment firms will also be offering the LISA but names and when they will be offering it are yet to be confirmed. Many big name banks and lenders, such as Nationwide, have chosen not to offer the LISAs as they feel that they are far too complex for the lender and those lending money.
The LISA is a tax-free flexible savings account for 18-39 year olds allowing them to save for their first home or a pension which you can access from the age of 60. You can save up to £4000 per year and a 25% bonus is added onto the years’ worth of savings by the government. So if you manage to save the full £4000, you will get a £1000 top up from the government for free.
It is worth being aware that there is a 25% exit penalty on the total amount of money in the account if money is withdrawn before 60 for any reason other than a first house purchase or terminal illness.
Although, they sound attractive and they may work well for some savers, saving for a house deposit and your pension in the same place has been described as dangerous due to them being two very different goals.
The risks of using the account for both reasons mean that after buying a house, it may be too late to start building up a decent pension leaving you with little money to fund your retirement. Officials and experts, including former pension’s minister, Ros Altmann, are worried that people will pull out of their workplace pensions in favour of these ISAs, potentially destroying their pension prospects.
She said; “The 25% bonus on the LISA works out exactly the same as the 20% tax relief people receive on pension savings. But this generous boost to savings and the greater flexibility of the LISA could mean a big risk of younger people opting out of automatic enrolment workplace pensions, and missing out on contributions from their employer.”
Some experts predict that LISAs could become the next mis-selling fiasco for the finance and banking sectors. The risks attached do not seem clear and therefore many feel that lenders and borrowers may not fully be aware of what they are selling and buying.
So although some people may see huge benefits in these LISAs for their home buying and pensions prospects, they could have unforeseen consequences for some savers. If you are thinking about signing up for a lifetime ISA when they are available to you, get in touch with an independent financial advisor (IFA) to discuss the benefits and drawbacks of this account for your situation.