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Watchdog proposes safeguards to protect consumers from Lifetime ISA ‘risks’

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16/11/2016
The city watchdog has proposed a set of measures to protect consumers investing in a Lifetime ISA after identifying a number of risks associated with the new style savings product.

The Financial Conduct Authority (FCA) proposes to regulate the Lifetime ISA in the same way as other ISA products, but with additional protections.

The Lifetime ISA is set to launch next April and will allow people under 40 to save for a house deposit or retirement simultaneously in one product. (See below for more on how the Lifetime ISA will work).

Risks

In a consultation paper published today, the FCA highlighted several pitfalls with the government’s new savings product including investors missing out on employer contributions if they opt out of a workplace pension in favour of a Lifetime ISA.

Also, investors being unaware that if they withdraw their cash before age 60 without buying a home, they will pay a 5% penalty.

Rules

Under the FCA proposals, firms offering the Lifetime ISA will be required to give specific risk warnings at the point of sale, including reminding consumers of the importance of investing in an appropriate mix of assets.

They will also have to remind consumers of the early withdrawal penalty and any other charges.

The FCA has proposed a 30 day cancellation period.

Criticism

The Lifetime ISA has faced a barrage of criticism since the idea was announced in the March 2016 Budget, with many experts suggesting it complicates the savings market.

This week former pensions minister Steve Webb, who is now director of policy at Royal London, said: “There is a real risk of a ‘mis-buying’ scandal as the wrong people take out Lifetime ISAs.

“The Lifetime ISA complicates the savings market and means that younger people who may not have access to financial advice will face difficult choices between staying in a workplace pension or opting for a Lifetime ISA.  It is vital that government and regulators put in place a strong regulatory regime to prevent people from taking out an unsuitable product.”

Reaction to the FCA safeguards

Responding to the watchdog’s proposals, Tom Selby, senior analyst at AJ Bell, said: “It is important that people considering opting out of a workplace pension in favour of a Lifetime ISA are aware of what they could be missing out on – a contribution matched by your employer is effectively a guaranteed bonus of 100%. Investors will also need to think carefully about their investment strategy depending on whether their objective is buying a house or saving for retirement.

“The initial proposals look sensible but careful consideration will be needed to ensure comparisons with pensions are as easy as possible and that the impact of the exit charge on returns can be understood.”

Tom McPhail, head of retirement policy at Hargreaves Lansdown, said: “The measures look sensible and are consistent with the types of financial education and communication we have been developing for LISA investors ahead of launching in April next year.”

How will the Lifetime ISA work?

From April 2017, investors aged between 18 and 40 will be able to open a Lifetime ISA account.

They will be able to pay in up to £4,000 each tax year up to the age of 50 and the government will add a 25% bonus to these contributions.

The funds, including the government bonus, can be withdrawn to help buy a first home worth up to £450,000 at any time from 12 months after first saving into the account, or after 60 to fund retirement.

Money can be withdrawn at any time before 60, but investors will lose the government bonus and any interest or growth on it, and have to pay a 5% tax charge.

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