Lifetime ISA mis-buying scandal a "real risk", warns Webb

Steve Webb, former pensions minister and Director of Policy at Royal London, has warned that there "is a real risk of a mis-buying scandal" as the wrong people take out Lifetime ISAs.

Related topics:  Savings & Investments
Rozi Jones
15th November 2016
Steve Webb
"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."

Commenting ahead of the publication of guidelines from the FCA on the regulation of sales of Lifetime ISAs, Webb says those who are not taking full advantage of the matching workplace pension contributions on offer from their employer should not take out a LISA.

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.

Additionally, Webb says that 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", says Webb.

He added: “The government has suggested that LISAs 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.   

Webb also warns that people who have already bought a house should "think very carefully" before opening a LISA as a ‘retirement only’ product, arguing that 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".

He concluded: “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 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.”

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