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Cover story: Will the Lifetime Isa be too slow off the mark?

Lifetime Isa

Banks and other product providers are shying away from Lifetime Isas amid fears that they are too complex and could lead to misselling

The curtain is raised on the Government’s latest crusade to aid first-time buyers this week, but many fear Lifetime Isas will not offer anything like the helping hand this group needs.

For one, complexity and confusion surround the Lisa. It is yet another Government FTB project in a long list, and it has a dual use – either for a first home or to save for retirement. This could baffle savers, which could mean the product is misused, it is claimed.

Meanwhile, some worry savers who plan to use a Lisa for a first home may end up drawing it for retirement because soaring house prices could be out of reach.

Then there is the fact barely any products will exist at launch, with talk of banks being put off by misselling concerns.

This is hardly the reception former chancellor George Osborne expected when he unveiled the Lisa in his final Budget in March 2016.

Adults under 40 can open a Lisa and save up to £4,000 a year until they are 50, with a 25 per cent bonus added on top, which is its key selling point. Savers can put their money in cash or invest in stocks and shares. They can either use the fund for a first home or withdraw it when they hit 60, with a 25 per cent penalty if they take it for pretty much any other reason.

Lisa key facts

The Lisa is yet another Government initiative to help struggling buyers on top of its sister product, the Help to Buy Isa. Then there are house-buying schemes such as shared ownership and the Help to Buy equity loan.

Andy Knee, chief executive of property specialist LMS, warns: “FTBs and young savers could be overwhelmed by choice or fail to identify the best option, potentially losing money.”

Quite apart from being part of a suite of products for FTBs, many think Lisas themselves are complex. One of their fiercest critics over recent months has been former pensions minister Ros Altmann, who has gone on record several times to warn they are “dangerous and complicated”. She says people could end up with an unsuitable product that could cost them in the future.

Tom Selby, senior analyst at investment firm AJ Bell, adds: “There are key consumer risks presented by the Lisa – namely people missing out on employer pension contributions and without being fully aware of the implications of the early withdrawal penalty.”

With all the risks, one issue debated over recent weeks is that Lisa sales do not have to be advised. John Charcol senior technical director Ray Boulger says “in an ideal world” they should be, but he accepts the cost would be disproportionate and says the national media and consumer groups can help to educate consumers.

The many concerns have led the Financial Conduct Authority to tell firms that offer Lisas to include warnings about the risk of giving up employer-based pension contributions. Providers must also warn about the risk of the Lisa affecting people’s right to claim benefits.

Aegon pensions director Steven Cameron says it could have done more. He says: “We believe the FCA should have gone further in specifying ongoing information and risk warnings, for example, to prompt a review of investment strategy if objectives change from house purchase to retirement funding.”

In a factsheet to members on Lisas, the Association of Mortgage Intermediaries says brokers need to tread carefully when giving advice.

It says: “The interplay with pension contributions and other investments may make this advice ‘regulated’ and firms may have to consider limiting permissions to avoid potential future liability.”

The harsh reality for many FTBs is in many parts of the country house prices are unaffordable, leading some to think wannabe FTBs who intend to take out a Lisa to buy a home will not be able to afford one.

“I think most people who intend to save for a home will draw the money when they retire as the cost of buying is too high,” says Alistair Hargreaves, executive mortgage and protection consultant at John Charcol.

Nationwide Building Society’s February house price index showed average values had risen by 4.5 per cent over the previous year, with a typical home costing £206,000, which is about eight times average earnings.

If someone saved the maximum £20,000 allowed in a Lisa for five years they would end up with £5,000 towards their first home. Yet for many, that may still not be enough to help get them on the housing ladder. The situation for FTBs is particularly acute in London and the South-east, where prices are at their highest.

Nationwide’s figures show that at the end of 2016 the average house price in London was a whopping £473,000 – well over double the national average. A Lisa can only be used to buy a home if it costs £450,000 or less, ruling out many homes in the capital.

“The maximum annual saving cap only helps those in certain parts of the country,” insists Knee. “The Lisa is therefore more likely to benefit those living outside the M25.”

One of the biggest obstacles for FTBs is the lack of supply which many state is helping to boost prices. Commentators, such as housing charity Shelter, insist the UK needs 250,000 new homes each year to keep up with demand. Yet latest Government figures show in the 2015/16 financial year, construction was started on just 172,490 UK homes.

“Investing heavily in the construction of new homes would help to address the chronic housing shortage, improving affordability,” says Knee.

Assuming they can afford a home, the bonus will undoubtedly help some FTBs, but the lack of interest from banks and building societies creates few options. At time of writing, only Skipton Building Society had committed to launching a cash Lisa, but not until June.

A handful of investment firms have said they will offer stocks and shares Lisas, but some experts insist the risk posed by investing is not right for many saving for a home.

“Cash is likely to be the favoured choice for FTBs who hope to be drawing on the savings to buy in the near-term, rather than risking capital,” says London & Country director David Hollingworth.

One whisper from the industry is banks have been put off by concerns of future misselling claims if savers forgo employer pension contributions for a Lisa, which would mean giving up free cash.

Ami chief executive Robert Sinclair told Mortgage Strategy last month: “The Lisa is an excellent initiative but you need some to offer a cash-based alternative.

“There seem to be a limited number of providers prepared to do that, which presents difficulties, and I’m not sure where we go from here.”

Scottish Friendly, one of the few firms to commit to launching an investment Lisa later this year, says the industry “needs to wake up and do more to embrace and promote the new investment”. It argues the lack of interest from the industry has led to less promotional marketing which means many are simply unaware of the product.

A recent survey carried out by YouGov and Mortgage Strategy sister title Money Marketing in March found two-thirds of 18- to 40-year-olds had never heard of it. Recent Scottish Widows and Aegon research papers reveal similar figures.

While extensive national press coverage over recent days may have helped boost awareness and understanding, it is hardly a good start.

Scottish Friendly commercial director Neil Lovatt says: “Awareness hasn’t been helped by the antipathy to the Lisa by the industry which seems to be ignoring its introduction. Implementation has been a botched affair by the Government.”

Of course, this is a long-term scheme and more providers could come onto the scene after launch. While there is plenty of skepticism, FTBs will ultimately qualify for free cash. The bonus percentage is no different to the existing Help to Buy Isa, but the Lisa allows FTBs to save more.

After the first month, the maximum deposit in a Help to Buy Isa is £200 per month, which is £2,400 a year. The 25 per cent bonus is paid on up to £12,000 in savings, so provides a maximum £3,000 bonus.

The Lisa allows £4,000 a year of savings, with no limit on the amount of the bonus. If someone opened one at 18 and saved the maximum up to age 50, they could get a £32,000 bonus.

Of course, that is unrealistic for many wannabe FTBs who hope to buy earlier. However, to beat the £3,000 Help to Buy Isa bonus cap they would only need to save the maximum in a Lisa for more than three years, assuming they could afford to, so it could prove a more lucrative scheme for some than its sister product.

Hollingworth says: “The Lisa follows a similar concept and will add more flexibility. The larger annual allowance gives a greater opportunity to save.”

While debate rages now, it will be many years before we know how effective Lisas are for FTBs, as CML spokesman Bernard Clarke explains: “It is too early to say how Lisas may affect the housing market as they are a long-term saving product.”

However, without a reasonable number of cash Lisas, the limited choice could hit take-up, as could the complexity. Ironically, that could mean Lisa creator Osborne, in his new role as editor of the London Evening Standard, may be among the first to decry its potentially tepid homebuying impact.

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