Demand for the Lifetime ISA (or LISA), introduced little more than a year ago, has not been strong — and very few financial service providers appear to have been keen to offer them so far.
And that’s been brought into focus by the Treasury Committee which has recommended abolishing them. But why?
One thing that counts against the LISA scheme is its complexity, and what I see as combining two totally disparate reasons for saving cash — buying a house, and retirement.
The government’s approach of offering that extra cash incentive of 25%, so that you can contribute up to £4,000 per year to a LISA and have an extra £1,000 added totally free, seems to be largely in recognition that offering tax-free allowances was not in itself working as a sufficient persuasion to get the UK’s working millions to invest more for their long-term future.
But that’s hardly surprising, seeing that the big focus is on cash ISAs, which are frankly not worth the bother. What’s the point in investing in a cash ISA just to save the tax on today’s pathetic typical rates of around 1% to 1.5%? That doesn’t even keep you up with inflation, which means putting your money into a cash ISA is likely to actually lose you money in real terms.
Stocks and shares
A regular ISA is a very good thing, but only if you invest in something that’s likely to beat inflation and reward you with profits that are actually worth saving the tax on. For me, that’s only a stocks and shares ISA, and it needs to be approached with a long-term view.
For the government, however, the solution was to offer cashback rather than tax relief, hence that 25% per year added to a Lifetime ISA. But, oh boy, did they mess it up — in two different ways.
One problem, which seems obvious to me, is that the proceeds from a Lifetime ISA can only be used in one of two ways. The cash can be used as a deposit for your first home, or it can be kept for your retirement. Hello? What do people wanting to buy their first home have in common with those considering their retirement income? Other than each group being unlikely to have considered the thoughts of the other?
Punishment
The other problem highlighted by the report is the punitive nature of the penalties imposed if you withdraw any cash for any purpose other than buying your first home or retiring. If you do that, you’ll be fined 25% of the cash you take out. On first glance, that might seem like you’ll just lose the government’s 25% bonus. But no, 25% of the total after that addition is more than the 25% bonus you get — so you’d actually be fined some of your original investment cash too.
Former pensions minister Ros Altmann has even said: “It is, in my view, another mis-selling scandal waiting to happen.” And such fears could well lie behind the lack of interest in offering LISA accounts by the UK’s financial institutions.
I agree that the complex profusion of ISAs is self-defeating. But if you do qualify for a LISA and you are sure you can use one for either of its two purposes, it could very much be of benefit. But time might be running out.
