14 November 2016
LIFETIME ISA TO BE NEXT BIG MIS-SELLING SCANDAL – CHANCELLOR MUST THINK AGAIN
- Providers beware – don’t sell this product carelessly, it could come back to bite you!
- FCA rules should require advice, suitability checks and risk warnings before providers sell this
- Pensions are best for retirement saving – right behavioural incentives to keep money for old age
- Lifetime ISA could snatch defeat from the jaws of victory as pension coverage rises
- Lifetime ISA won’t last a lifetime – and may confuse younger people into opting out of pensions
- Greater risk of later life poverty for today’s younger generations who spend all LISA at 60
I am calling on the providers to wake up to the risks of selling Lifetime ISAs to people who would be much better off using pensions for their retirement savings. I hope that the Chancellor will recognise these risks and make changes in the Autumn Statement. We should not confuse people about the best way to save for retirement – pensions are unquestionably the best for the vast majority of people. If the Treasury does not understand the risks, then I hope the FCA will clamp down on how these products are sold, to make sure there must be careful suitability checks and risk warnings before people lock money into the LISA, thinking this is an appropriate way to save for retirement.
I list here twelve reasons why Lifetime ISAs are a bad idea for retirement saving
- LISAs likely to be new mis-selling scandal waiting to happen – not simple products, need proper risk warnings and suitability checks: LISA must not be sold carelessly. The FCA and providers should recognise need for proper risk warnings and adequate suitability checks. Without proper safeguards for consumers, this is a major new mis-selling scandal waiting to happen, when workers wake up to the fact that they are much worse off than they would have been in a workplace pension scheme. Will they complain to their provider or their employer? We don’t know, but it is clear that those who opt out of workplace pensions, or give up an employer pension contribution or lose out on higher rate tax relief will be worse off with a LISA than a pension. Even those who don’t give up an employer contribution could be worse off. If this product is sold carelessly and they don’t realise this, they will have valid reasons to complain in coming years.
- People likely to have less money in retirement as a result of the Lifetime ISA: LISA will see lower contributions going in, lower investment returns, some withdrawals along the way. The amounts of money going into LISA will be lower than if workers put the same amount into a pension. This is because at best they only get the equivalent of basic rate tax relief, they will not have an employer contribution, they will lose any National Insurance relief or higher rate tax relief they could get on pension contributions, more is likely to be saved in cash giving lower long-term returns, charges may be higher than pensions as there are no controls on the Lifetime ISA charges and they may spend the whole lot at age 60.
- Snatching defeat from jaws of victory as Lifetime ISAs will confuse workers about how best to save for retirement: As auto-enrolment is bringing millions more people into pension saving, and opt out rates are low, it is clear that workers have welcomed being put into pensions by their employer. This is a real success story, but we may be about to snatch defeat from the jaws of pensions victory. If people hear about Lifetime ISAs and don’t understand the benefits of pensions, they may be tempted into opting out of a workplace pension and using a LISA instead. This will leave workers worse off in later life and at much greater risk of poverty in old age than if they saved in a pension.
- Lifetime ISAs will not last a Lifetime – behavioural incentive is to spend all money at age 60: The LISA has major incentive to spend the entire pot around age 60, which means having nothing left in your 80s. This is not a sensible retirement saving structure! The point of retirement saving is surely to make sure future pensioners in decades to come will have money to live on, in excess of just state benefits, when they reach much later life. A pension incentivises people not to spend the money too soon, since pension freedoms mean they will pay large amounts of tax if they take too much out, whereas it can pass on tax free now that the 55% death tax charge has been abolished. Incentivising spending the money too soon is classic irresponsible pension policymaking, leaving future Governments to clear up mess created by today’s policies.
- Lifetime ISAs cost today’s taxpayers billions of pounds while still leaving a future Government to deal with millions of poor pensioners who spent it all too soon: Today’s taxpayer subsidy is forecast to cost billions of pounds, but this public money will be wasted if future 60-somethings just spend the whole lot as soon as they can because it’s tax free and because they fear a future Government will tax the money. Giving taxpayer help for house purchase is fine, but let’s focus the retirement saving help on pensions, rather than confusing people with a new inferior product.
- Less money will go into LISAs than pensions: Upfront tax incentives for LISA are no better, and will generally be much worse than for pensions. Partly because the 25% is only the same as basic rate tax relief, partly because there is no employer contribution, partly because people will lose any National Insurance relief and of course people may not trust a future Government to keep the money tax free and therefore contribute less.
- Less money will build up over time than with pensions: Lifetime ISAs will see less money building up in long-term savings than would be the case with pensions. This is because there is no employer contribution, there is no higher rate relief (the 25% is the same as basic rate relief which is the minimum available to pension savers), partly because more will be held in cash and partly because some people will have taken money out along the way.
- 5% penalty on Lifetime ISA withdrawals will drain people’s resources: The 5% penalty on withdrawals is draconian – especially as we are about to cap exit penalties on pensions at 1%! We have seen with 401Ks that many people simply take money out because they can and therefore less is left for later life. A retirement saving product is best left alone till retirement, and ideally needs to last until your 80s or 90s. Pensions are far better for this than ISAs.
- Pensions are more likely to last a lifetime than Lifetime ISAs. With no inheritance tax to pay on money passed on from the pension, and no 55% death tax charge, it is safe to keep the money for later life. However, with an ISA, people will want to spend the money sooner while it is tax-free and there is no ‘brake’ on spending it too quickly.
- Lifetime ISA could help first time buyers, but we already have HelpToBuy ISA so why confuse ISAs with another product? Those saving to buy their first home can benefit from using a LISA, but there is already a Help To Buy ISA for that purpose. We do not need to confuse the ISA brand with yet another product – it is better for people to keep this simple and separate.
- Lifetime ISA will be great for wealthy people – but are they the ones who need further taxpayer subsidy?: Many people wanting to buy Lifetime ISAs will already have filled their full £40,000 annual allowance, or Lifetime Allowance. Some IFAs have wealthy clients who are eager to take advantage of the generous taxpayer subsidies as another tax-incentivised savings vehicle for their children or grandchildren. But is this a sensible use of taxpayer subsidy? Those who most need retirement savings will normally be better off using pensions – do not need another product to confuse people, or cost more taxpayer resource.
- Most ISAs are held in cash with lower long-term returns but no controls on charges: Cash savings can be fine if you’re saving for a house or other defined nearer term goal, but for retirement saving the best investments are longer-term investments that have better growth potential and should give more money for pensions in later life. People may end up with relatively high charges for this complicated product while saving in cash.