Fixing the Lifetime ISA flaws
The Lifetime ISA (LISA) may be an ISA by name rather than a pension, but it looks more like a pension than an ISA by design.
The Government has denied a direct link between the launch of the LISA and the recent consultation on the future of pensions tax relief. In spite of this denial it still seems worthwhile to measure all aspects of the design of the LISA against the principles contained within the pensions tax relief consultation.
The first principle of the pensions tax relief consultation was that the outcome should be ‘simple and transparent’. Within the body of the consultation the Treasury went further by stating that an ISA-like system “may allow individuals to better understand the benefits...as the government’s contribution might be more transparent”.
The Lifetime ISA looks certain to be a key addition to the range of options available for savers for many years. However the one aspect of the Lifetime ISA where it appears most at risk of failing the ‘simple and transparent’ test is unmatched contributions i.e. the option of making contributions to the ISA above the £4,000 annual limit and/or paying them beyond the age at which the matched bonus is offered.
There are three potential ways in which unmatched contributions could be dealt with:
- They could be subject to the same withdrawal penalties as matched contributions – if this is the end position then savers would be much better off making an unmatched subscription to an ISA which does not suffer exit penalties.
- There are no withdrawal penalties – this would create a need to track the value of the matched and unmatched pots, leading to confusion for savers, complexity for ISA managers and potentially attempts to try and be clever with growth rates to assign additional value in the unmatched pot.
- Unmatched contributions are scrapped and savers just make subscriptions to other ISAs – the main negative regarding this option is that some savers may need to maintain two ISAs rather than keeping all their contributions in one.
If the principle of simplicity and transparency is as important to the design of the Lifetime ISA as it was to the pensions tax relief consultation, the final option is a clear winner.
Early access options
It is important the Government doesn’t lose sight of the fact that savers view ISAs as being more straightforward than pensions. Offering a range of early access options risks creating a position where the Lifetime ISA is seen as complex. Let’s concentrate our initial efforts on getting the first home option right, and build from there.