Baroness Ros Altmann says care must be taken that the introduction of LISAs does not detract from pension saving
As the new State Pension will reduce future State Pension income, it is vital to continue to incentivise private retirement saving for ever-lengthening later life. I believe pensions are the best vehicle for that.
Since the freedom and choice reforms, pensions have become more user-friendly and auto-enrolment is extending pension coverage across the population. Just when we have the opportunity to capitalise on the success of such reforms - along comes a new product that will confuse customers.
The new 'Lifetime ISA' (LISA), unwisely mixes saving for house purchase with investing for long-term retirement needs. The existing help-to-buy ISA could be reformed without introducing a new product and when masquerading as a pension, the LISA is actually dangerous. It has huge mis-buying and mis-selling risks.
Just when we have the opportunity to capitalise on the success of such reforms (freedom and choice)– along comes a new product that will confuse customers.
Young people choose LISAs because they could access their money if they need to, without realising the 25% Government bonus is exactly the same as 20% tax relief. Many could also lose employer contributions and higher rate tax relief - and possibly more if they have salary sacrifice.
Some may prefer the idea of getting their money back if they need to, without understanding that the 25% Government 'withdrawal charge' is not just recouping the 25% bonus. It represents about 6% capital loss (while pension exit penalties are being capped at 1%)
This complex product should not be sold carelessly. To its credit, the FCA is trying to impose regulatory requirements on Lifetime ISA providers to protect and inform consumers. But there are such big information asymmetries, reams of new disclosure documents are unlikely to help much.
LISAs introduce new risks in both the investment structure and the wrapper itself.
Issues to consider
There are no controls on charges or default funds. More of the money will be held in cash, some will be withdrawn and suffer the penalty, and contributions must stop at age 50, which is actually the age at which people should be considering stepping up their later life savings, not stopping altogether.
Pensions encourage money to be held into your 80s and 90s. With LISAs, the behavioural incentive is to spend it all around age 60, tax-free, in case a future Government taxes it to recoup the 25% bonus.
So 'Lifetime ISAs' are unlikely to last a lifetime. The taxpayer bonus supposedly aims to ensure people can support themselves privately in their old age, but the vast majority will be worse off in their old age saving in a Lifetime ISA than if they had put their money into a pension instead.
Financial advisers with wealthy clients who have filled their pensions or provided pensions for grandchildren now have another product to use for tax planning. Is that a wise use of taxpayer incentives?
To their credit, many providers are nervous about this product too - they can see the potential consumer detriment if someone opts out of a pension or turns away from an employer contribution, or doesn't realise the scale of the 'Government's withdrawal charge'. I am pleased to see most companies will not be launching LISAs next month.
The Lifetime ISA would most likely mean worse retirement outcomes for future generations. It has clear mis-selling risk, could undermine auto-enrolment and confuse younger people.
Pensions must not be turned into ISAs. Let's not inadvertently undermine future pensioner living standards by introducing an inferior product that will leave future generations with more poor pensioners to support. Instead, let's build on the success of pensions auto-enrolment, encourage higher pension contributions, explain the merits of pensions more clearly to the public, engage young people more and perhaps reform pension incentives to make them work even better for basic rate taxpayers.
It's time to promote pensions, not destroy them.
Baroness Ros Altmann
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