LISA sale must include workplace pension warning: FCA

The FCA says it is proposing to regulate the LISA in the same way as other ISA products, with some additional protections designed to reflect the dual purpose of a LISA and the restrictions on accessing funds.

From April 2017, investors under the age of 40 will be able to open a LISA account and pay in up to £4,000 each tax year up to age of 50 (the Government will add a 25% bonus to these contributions).

Investors can use the accumulated funds, including the Government bonus, to help buy a first home worth up to £450,000, or withdraw the accumulated funds at any time to purchase a first home or in case of terminal illness, or after the age of 60. However, they will lose 25% of any money they withdraw before age 60 for any other purpose.

Under FCA rules, firms will be required to give specific risk warnings at the point of sale which include reminding consumers of the importance of ensuring an appropriate mix of assets is held in the LISA. Firms will also have to remind consumers of the early withdrawal charge and any other charges.

The FCA says that investors in LISAs should also receive specific risk warnings around incurring the early withdrawal charge which may mean that they receive less from their LISA 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 LISA instead.

The regulator has also proposed that providers will have to offer a 30 day cancellation period after selling the LISA.

Earlier this week, former pensions minister Steve Webb warned that there "is a real risk of a mis-buying scandal", arguing that 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.

Rachel Vahey, product technical manager at Nucleus, commented: "It’s right firms need to make sure consumers have the right information to make the best decision on how to save. So we agree with the FCA’s proposals of getting firms to point out when the person takes out a Lisa the risks of losing an employer pension contribution and of early withdrawals.

"But we also think the consumer should be made aware of the impact of the 25% withdrawal when they take the money out as well, so they understand at that vital point how much money they will get back.

"We also want to see the rules changed so paying for adviser charging from the product doesn’t trigger a withdrawal charge of 25%. Instead this should be an allowable withdrawal. The government should be encouraging more people – whatever their age – to seek advice. Lifetime Isa savers should not be penalised for paying for advice for the best way to save for their financial goals.

"We also want the government to reduce the penal 25% withdrawal charge. Although, we agree it needs to reclaim any bonus and growth on early withdrawal, there is no reason for the additional high charge. Instead, savers should be put back in the position as if they had taken out a ‘normal’ Isa."