People should not be encouraged to take out the new Lifetime Isa if they have not already taken full advantage of matching workplace pension contributions, former pension minister Steve Webb has warned.
Commenting ahead of the publication of guidelines from the FCA on the regulation of sales of Lisa, Royal London director of policy Steve Webb warned of a risk of mis-buying, echoing misselling concerns voiced by his successor, Baroness Altmann, earlier today.
Webb argues the Lisa top up of 25p per pound invested would not beat a combination of matched employer contributions and tax relief. He has also highlighted the risk of people investing in cautious assets for decades, achieving lower outcomes than they could have got through a more aggressive investment strategy through a pension.
Webb says: “There is a real risk of a ‘mis-buying’ scandal as the wrong people take out Lifetime Isas.
“There should be a presumption against taking out a Lisa for those who are not taking full advantage of the matching workplace pension contributions on offer from their employer; for example, a worker who puts £1 into a Lisa would get 25p in top-up from the Government compared with a £1 contribution from an employer who was prepared to ‘match’ employee pension contributions.
“Young people who invest in a pension can take a long-term perspective and benefit from investing in higher risk assets; there is a real danger that those who take out a Lisa will invest in cash, perhaps for a decade or more; a combination of low interest rates and rising inflation could make this a very poor savings strategy;
“The government has suggested that Lisa would be suitable for the self-employed because of the ability to withdraw cash, but the hefty exit penalty means self-employed people should not take out a Lisa with a view to treating it like an easy-access savings account.
“People who have already bought a house should think very carefully before opening a Lisa as a ‘retirement only’ product; with no contributions allowed after age fifty and a lock-in of cash until age sixty, there are serious questions about the suitability of the Lisa for this group;
“The Lisa 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 Lisa. It is vital that Government and regulators put in place a strong regulatory regime to prevent people from taking out an unsuitable product.”