Unveiled by former chancellor of the exchequer George Osborne in the March budget, Lifetime Isas will be rolled out in April 2017 and allow savers to pay in up to £4,000 ($4,983, €4,634) a year, with a 25% government bonus on contributions.
The money saved can be used to buy a first home worth up to £450,000, or can be accessed from age 60 or in the event of terminal illness, meanwhile withdrawals for any other purpose will attract a penalty charge of 25% on the whole fund, including any growth.
Risk warnings
In a consultation paper published on Wednesday, the FCA said because the Lifetime Isa combines short to medium-term savings with long-term investments, as well as the early exit charge, it presents risks to its objective of consumer protection.
The regulator added that as a result the product porviders will have to issue specific risk warnings to consumers.
“Investors will need information about how a Lifetime Isa works, for example, eligibility, government bonus, early withdrawal charge, etc.
“We believe investors in Lifetime Isas that include a relevant investment should also receive specific risk warnings in respect of incurring the early withdrawal charge which may mean that they receive less from their Lifetime Isa than they paid in.
“And potentially losing an employer contribution to a workplace pension for which they may be eligible, where they choose to open a Lifetime Isa instead,” said the FCA.
The watchdog set out plans for savers to be shown a projection table estimating what they can expect to get back from their Lifetime Isa at age 60, highlighting the bonus, specified returns, and inflation.
Furthermore, the FCA added that firms will have to offer a 30-day cancellation period when a Lifetime Isa is opened.
Industry reacts
Former pensions minister Ros Altmann has repeatedly blasted the Lifetime Isa, describing the exit charge is “punitive”.
She called for the Government to think again about the introduction of Lifetime Isas, and warned: “Providers beware – don’t sell this product carelessly, it could come back to bite you.”
She has also warned that the product will discourage workplace pension saving, describing it as a “mis-selling scandal waiting to happen”.
“I am calling on the chancellor to realise the dangers of trying to encourage people to use a so-called Lifetime Isa” as a retirement savings product. This product is masquerading as a pension, [and] will confuse workers who may opt out of much better workplace pensions.
“This is an obvious mis-selling scandal waiting to happen. I am also calling on the FCA and providers to recognise the risks before it’s too late,” said Altmann.
Meanwhile, Tom Selby, senior analyst at financial services firm AJ Bell, said “It feels like the Lifetime Isa is too far down the road for major changes but it has some vocal critics, including two former pensions ministers [Altman nans Steve Webb] so it will be worth keeping an eye on any surprise changes to the rules.”
He added that the 25% penalty charge seems “overly punitive” given the FCA’s decision earlier this week to cap exit fees on pensions at 1% for pensions.
