LISAs not replacing auto-enrolment
24 November 2018
More than half of Lifetime ISA customers are using the product for retirement (56%), while a third are saving for their first home (32%), a new survey by AJ Bell has shown.
The LISA is currently only available to savers aged 18-39 and allows them to save up to £4,000 a year, with the government topping it up by 25% to a maximum of £1,000. Funds can be withdrawn tax-free to put towards a first home, provided it is worth less than £450,000, or if savers are aged 60 and over or terminally ill.
The introduction of the LISA in 2017 stoked fears it could cause a surge in auto-enrolment opt-out, however AJ Bell’s findings have shown concerns to be misplaced. Around 80% of the survey’s LISA savers contribute to a workplace pension, and only 3% said they have chosen to quit their workplace scheme to fund their LISA.
Tom Selby, senior analyst, AJ Bell, said of the research: “Rather than sowing the seeds of auto-enrolment’s demise, the LISA is providing a valuable savings option alongside the flagship reforms. The fact so many people are making an active decision to save in a LISA over and above the auto-enrolment minimum is hugely encouraging and makes a mockery of calls made in some quarters to scrap the product altogether.”
However, Selby said the government should address the issue of the exit penalty, which places a 25% charge on money taken out if savers do not meet the strict requirements of the LISA. Selby said the rules had created confusion with one in five respondents unable to explain how the 25% early withdrawal charge works.
Selby added: “With the LISA approaching its second birthday now is the time to revisit the mechanics of the product. Scrapping the exit penalty would be a sensible place to start. At the very least the exit penalty should be reduced to 20% so that it equals the value the government bonus adds to contributions and covers investment growth achieved on the bonus.”
The AJ Bell survey was conducted among 400 Lifetime ISA customers.
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