Malcolm McLean says while the LISA may be attractive for some people, as a long-term savings vehicle it falls far short of the traditional workplace pension.
It is true to say that the introduction of the new lifetime ISA (LISA) has had something of a mixed reaction.
To its supporters, the LISA offers an exciting and flexible way for adults under 40 to start saving for their first home or later life with a 25% boost from the government. To its critics, it has echoes of George Osborne's alleged intended plans to move to a full-scale pensions ISA, with the ultimate purpose of alleviating the cost to the exchequer of pension tax relief, and could have negative consequences for conventional pension saving more widely.
It is still early days, of course, with the launch little over a month old and only a limited number of providers yet in the market. If, as has been suggested however, demand for the LISA grows, many more providers including the banks will eventually look to promote and sell the product.
In many respects it is good that the government is encouraging saving and providing generous bonuses in support of that end. There has to be a worry, though, that the LISA could, unwittingly or otherwise, have a negative impact on pension saving and could undermine the success (so far) of auto-enrolment (AE).
It seems a strange time for the Treasury to be introducing this new product with the phased introduction of AE still not complete and actually at a most critical stage over the next two years with the take-on of tens of thousands of the smallest employers. For many young people with limited resources it will inevitably be an either/or situation, with new research recently showing that one in three under-40s are likely to cut back on pension saving in favour of a LISA.
In terms of a comparison with pensions, as a long-term savings vehicle, the LISA in my opinion falls well short of that in a workplace pension savings plan. The big difference is that in the latter there is a mandatory employer contribution, which as yet does not extend to a LISA. There is also the opportunity with a pension to continue contributing beyond your 50th birthday and attract further investment returns in the process. It will normally also be possible to access your money from age 55 unlike a LISA where, other than for a withdrawal for house purchase, you have to wait until 60.
And, finally at a time when exit charges on pensions are largely in retreat, inappropriate withdrawals from an ISA attract a rather draconian 25% penalty on the whole of your accumulated fund - which means you could get back less than you invest.
I can't pretend that the LISA is necessarily more complicated than a pension plan but there are a few hidden traps with the LISA (as indicated above), which the uninitiated could easily fall into and which the Financial Conduct Authority is now requiring the providers to spell out to the potential LISA customer in advance - notably the loss of a possible employer contribution from the alternative of a pension plan.
I am also slightly doubtful about mixing up saving for retirement and saving for a house purchase and whether in London in particular the £450,000 figure is in any way a meaningful one.
Overall though, I can see that a LISA is an option for those who are saving for their first home, and equally could be beneficial to the self-employed or others seeking another savings vehicle for their retirement. But - and this could be a big but - it shouldn't be seen as an alternative to a traditional workplace pension. We can but hope that the fears on this count prove to be unfounded.
Malcolm McLean is senior consultant at Barnett Waddingham
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