LISAs: the new savings vehicle – the FCA consults and the Autumn Statement approaches

A new savings vehicle, the LISA (Lifetime ISA), is due to be made available from April 2017. This product is designed to enable individuals to save both for a deposit for their first home, and also for their retirement. The government has published the Savings (Government Contributions) Bill 2016/17 containing provisions about the LISA and this is making its way through Parliament. In this briefing we review the details of who can save into a LISA, the conditions on contributions and withdrawals, and the implications of this new product for the pensions savings landscape. We also consider a recent FCA consultation paper and possible announcements in next week’s Autumn Statement.

The basics

LISAs are due to be available from April 2017. Individuals aged between 18 and 40 will be able to open one. It will be possible to pay in up to £4,000 in each tax year, with no monthly limit on contributions, and an individual can keep making contributions up to age 50. Payments into a LISA will be out of taxed income. The government will add a 25% bonus to contributions – so individuals who save the maximum annual amount will receive £1,000 a year from the government.

It will be possible to contribute to a LISA and other types of ISA in a tax year, with an overall ISA contribution limit of £20,000.

Withdrawals

It will be possible to withdraw funds tax free (including the government bonus) from a LISA to buy a first home worth up to £450,000, at any time from 12 months after first saving into the account. A first time buyer will be defined as someone who does not own and has never owned an interest in a residential property, either inside or outside the UK, whether bought or inherited. This must be for a home to live in, not for a buy-to-let property.

It will also be possible to withdraw funds (including the government bonus) from age 60, tax free, for any purpose. Provision will be made to allow withdrawals in the event of terminal illness.

Withdrawals at any other time will be possible, but a 25% government charge will be applied on the whole withdrawal, including on any investment growth.

Future features?

Further flexibilities may be added to LISAs in the future, including the possibility to borrow funds from the LISA without incurring a charge if the funds are repaid, and to access funds without a government charge on specified life events. These will not feature when the products are first launched.

Tax

The LISA offers  a taxed, exempt, exempt method of taxation – contributions are from taxed income, while the investments in the LISA are broadly tax exempt, and withdrawals are tax free (exempt).  This contrasts with the current exempt, exempt, taxed approach to traditional pensions, where contributions and investments are broadly exempt from tax, while withdrawals are taxed at the individual’s marginal rate.

Commentary and Autumn Statement

Commentators and industry bodies have expressed a range of opinions about LISAs. One of the main concerns is that its introduction could lead to employees (particularly ones who are saving to buy a home) opting out of their employer’s pension scheme in order to save into a LISA. This could be the wrong decision for the employee and undo the good work done by automatic enrolment.

There has been discussion about fees, including the early exit charge that will apply if funds are taken other than for a first home purchase, on terminal illness or after age 60. This charge includes an exit fee of 5%, which may seem high in an environment where early exit charges from pensions are due to be capped at 1%,

As the Autumn Statement approaches, there have also been calls for the introduction of the LISA to be delayed (a number of providers have said they will not be ready to launch a LISA by April) or even cancelled due to concerns about the potential for damage to pension schemes and or mis-selling. The Chancellor has changed since the LISA was first announced and there is no guarantee that Philip Hammond will follow through with this proposal.

FCA consultation paper

For now, the FCA has released a consultation paper  ‘Handbook changes to reflect the introduction of the Lifetime ISA‘.  The consultation paper sets out the FCA’s proposed approach to regulating the LISA’s promotion and distribution.  It considers several risk areas in connection with the LISA, being complexity, contributions, investments and access.  For example, in the area of complexity it identifies the risk that 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.  In relation to  contributions, it highlights two risks.  First, loss of the employer’s contribution as a result of opting out of a pension scheme and second, forgetting to revisit (and increase) other savings at the age of 50 when it is no longer possible to save into a LISA.

The consultation paper goes on to consider other measures such as LISA specific information disclosures and investor cancellation rights.

Implications for trustees and employers

The consultation is open until 25 January 2017 and we await the responses with interest.

For now, trustees and employers will want to monitor the development of the LISA. Employees aged up to 40 may be thinking about how a LISA compares with their workplace pension and about what approach to saving is best for them. The FCA’s consultation underlines the fact that this is difficult question, with no ‘one size fits all’ answer.  As ever, trustees and employers need to avoid straying into giving financial advice and should consider seeking legal advice if they are considering any form of communication on this topic.