Launch of the Lifetime ISA
The Lifetime ISA, one of the final flagship policies of the George Osborne - David Cameron era, finally launched at the beginning of the month to little fanfare.
The new Lifetime ISA (or LISA, as it’s also being called), was first announced by George Osborne in his 2016 Spring Budget. Much has changed since then, of course. At that point, Osborne was still Chancellor, David Cameron was still Prime Minister, Boris Johnson was still the Mayor of London, the vote for Brexit was a few months away and the idea of Donald Trump being elected as President was still a wild fantasy.
While the new administration of Theresa May and Philip Hammond have gone against the idea of scrapping the Lifetime ISA, its underwhelming launch suggests George Osborne’s brainchild is not at the top of their list of priorities.
And they’re not the only ones giving it a lukewarm reaction – most major banks are either very sceptical, or downright suspicious, of the new scheme. More on that later.
First, though, a quick recap on what exactly the Lifetime ISA involves. At the time it was announced, we took a closer look at the possible advantages of the new initiative, which aims to help young people save towards either their first home or their retirement. Eligible to anyone aged between 18 and 40, it allows savers to save up to £4,000 a year, with a 25% government bonus – worth up to £1,000 – received at the end of each tax year. This yearly bonus is paid until a person reaches the age of 50.
Separate Lifetime ISAs can be taken out by two different people, and both can be used towards the purchase of a property, giving hope to couples that raising the deposit for a home will become significantly easier. People can put as much or as little into the ISA as they want, withdrawing money (tax-free) at any time. Penalties will only be levied on those who withdraw money to spend on non-property related things.
What’s more, the Lifetime ISA can be used alongside the other ISAs available, including the Help to Buy ISA, cash ISAs, stocks and shares ISAs and innovative finance ISAs. The annual ISA limit, however – which has been upped to £20,000 for the 2017/18 tax year – must not be breached.
For those starting at 18 and saving the maximum amount each year until they’re 50, some £32,000 in government cash would be coming their way over time. Meanwhile, for those who don’t want to use it towards the purchase of a property (costing up to £450,000), it can instead be used for retirement purposes, as solid savings for later life. If the Lifetime ISA is being used to help fund retirement, the money can be accessed when a person turns 60.
However, while the Lifetime ISA is seen as something of a no-brainer for first-time buyers, there have been warnings about its usefulness for retirement savings, with a LISA likely to be far less rewarding than a pension.
Of course, the main advantages of the Lifetime ISA are fairly obvious – the prospect of tax-free savings and a sizeable government bonus at the end of each year if you save plenty. It has limitations, though. Until you reach 60, you can only withdraw the money for property buying purposes. If you still want to spend the money on non-property matters, and you’re under 60, you face a 25% penalty.
Also, you aren’t able to withdraw any money or redeem the bonus until you have held a Lifetime ISA account for a year, meaning your savings are locked in for this period. For a person looking to buy their first home now, or in a few months, the Lifetime ISA doesn’t offer too much assistance.
On the other hand, the Lifetime ISA helps towards a deposit in a way the Help to Buy ISA can’t. While the bonus for the Help to Buy ISA is only paid upon completion, meaning it can’t be used for the initial deposit, there is nothing to stop people with a Lifetime ISA putting funds directly towards that much-needed deposit.
One of the main potential barriers to the success of the Lifetime ISA, though, is the lack of enthusiasm from most providers, including major high-street banks and building societies. Halifax, Santander, Barclays, Nationwide, HSBC, Lloyds, etc. – none are offering Lifetime ISAs at the time of writing and none have any plans to change that stance.
Providers who specialise in stocks and shares ISAs are much more enthused. Hargreaves Lansdown, Nutmeg and The Share Centre are all offering Lifetime ISAs, while others have plans to introduce one later in the tax year or are currently reviewing final rules and guidance. Most, however, offer a firm no when asked whether or not they will be providing LISAs. Skipton Building Society is so far the only high-street savings provider to confirm it will offer a Cash Lifetime ISA, starting from June 2017.
Why are other banks and building societies so reluctant?
The Treasury has so far failed to convince hesitant providers to offer the accounts, with banks and building societies concerned about the prospect of being dragged into a mis-selling scandal of PPI proportions.
The ISAs offered by the likes of Nutmeg and Hargreaves Lansdown aren’t much use to first-time buyers, as they are offering investment ISAs which are considered too risky and dangerous for house deposit money. Skipton Building Society, meanwhile, is a fairly small player compared to its more established rivals and simply doesn’t have the reach offered by the likes of HSBC, RBS, Halifax, Santander, Barclays or Nationwide.
Jane Ellison, Financial Secretary to the Treasury, has admitted that “the number of providers of the Lifetime ISA may be small to start with”, but she expects a number of stocks and shares providers to be signed up from the outset, allowing people to open accounts now, and the first bonuses to be paid by April 2018. The Treasury also hopes that the market will continue to grow, with more providers – including, crucially, cash providers - offering Lifetime ISAs over the course of the next 12 months as systems are put in place and products honed and developed.
The early signs, however, are not promising, and there are some who fear that Osborne’s flagship scheme will be a disastrous flop. With a failure to get any major banks or building societies on board, the Treasury is going to have to work incredibly hard to convince the sceptics and make a success of the Lifetime ISA.
The main issue for the banks is the risk of mis-selling the Lifetime ISA to young savers as a better option than a pension, when all the figures suggest otherwise – in fact, calculations show that those opting for a Lifetime ISA over a pension could be worse off to the tune of £419,435. It’s easy to see why providers are holding back.
Part of the issue is the dual nature of the Lifetime ISA, trying to offer two very different things in one bundle – deposit money for a first home and retirement savings. The two don’t marry together comfortably, causing confusion and potential issues further down the line.
Unless the Treasury can start to get some major players on board soon, the prospects of the Lifetime ISA look bleak. It is little wonder, therefore, why the launch was kept so low-key.
For more information about the Help to Buy schemes available, read our guide on the Help to Buy ISA and Lifetime ISA Explained.