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Government risks LISA backlash

19 August 2018

AJ Bell has warned that the government would risk the wrath of young voters if it scraps the Lifetime ISA.

The pension provider said the product has proved popular with consumers so far and to get rid of it now would be “ludicrous” and cause uproar among younger generations.

The Lifetime ISA was first introduced in 2016 to help young people save for a first home or retirement, but a recent report into household finances by the Treasury Committee criticised it for being unpopular. In its review, it found the Lifetime ISA to be too complex, have “perverse incentives” and said it did not complement traditional pensions.

However, according to AJ Bell, the LISA is no more complicated than a pension and on the contrary, could be easier to explain. Furthermore, concerns that savers will spend their fund far too quickly due to withdrawals being tax-free from age 60 is out of sync with the current pension freedoms.

Tom Selby, senior analyst at AJ Bell, said: “The claims LISAs don’t complement pensions lacks any real justification. In fact, for many having a LISA pot to spend before accessing their pension will make perfect sense as it allows their pension more time to grow. We need to remember that for some people – particularly the self-employed and basic-rate taxpayers – the deal on offer from a LISA can be more attractive than a personal pension. This is all about personal choice and preferences.”

Selby added: “Nobody is claiming the LISA is perfect and policymakers need to look at ways to make the transfer process easier to navigate. The 25% exit penalty also remains a bone of contention and should be reduced so as not to excessively penalise savers.But ditching the LISA now would make little sense and risks leaving hundreds of thousands of people who have already invested stuck in limbo.”

LEBC Group also came out in support of LISA earlier this month, stating that a generation of young savers struggling to buy their first home will be hit if the government scraps it.

LEBC Group recommended that rather than abolish the product, it would benefit from being simplified.

Kay Ingram, director of public policy LEBC, commented: “The Treasury Committee is right to highlight the complexities of the LISA, which unfairly penalises savers for withdrawing cash which is not then used specifically for the purchase of a home – but a relatively simple reform is all that is required, not outright abolition of the scheme.”

LEBC called for technology already being used among private pensions to earmark the contributions of members and employers in separate pots to help to overcome the complexities of the scheme. By using this approach, the LISA could separate individual and government contributions and the clawback for non-house purchase withdrawals could be restricted to the pot built up by the taxpayer subsidy.

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