The Government’s Lifetime Isa could be knocked off course just two months after being unveiled as the industry challenges key features of the flagship product.
The Association of British Insurers and firms acting independently are lobbying the Treasury to drop aspects of the Lifetime Isa, due to launch in April 2017.
Fund Strategy understands potential providers have pushed back over plans to let savers contribute beyond the £4,000 matching contribution limit over concerns this will push build costs through the roof.
In his March Budget Chancellor George Osborne hinted the flexibility of American 401k plans – where savers can withdraw money without penalty for certain life events – could be adopted in the UK. But firms warn building a system for policing early access could be too high a hurdle to clear within 10 months and will only confuse customers.
The Lifetime Isa is aimed at under-40s who will receive a 25 per cent Government bonus capped at £4,000 a year until they reach 50.
However, the Treasury decided not to consult publicly in favour of informal discussions with individual firms and trade bodies.
One area of dispute is whether savers should be allowed to contribute beyond £4,000. Fund Strategy understands providers are lobbying the Treasury to block contributions above this level.
Firms say leaving this option open will mean building a system that tracks different savings that do and do not attract the Government uplift.
The same problem exists if a saver wanted to contribute beyond the age of 50, when the bonus ceases.
“Adding other life events would add further complexity without necessarily boosting savings”
Old Mutual Wealth pensions technical services manager Jon Greer says: “The nearest to this I can think of is overseas pension schemes. They have to keep funds that have attracted UK tax relief separate and identifiable from the growth in those funds. Those attribution rules are unbelievably complicated and that complexity could easily fall into the Lifetime Isa if you have contributions above £4,000 going into the same Isa as the bonus.”
AJ Bell technical resources manager Gareth James says unless the Government blocks additional contributions it will fail the “simple and transparent” test it set itself in the consultation on tax relief reform.
But he says the main drawback in curtailing the ability to contribute is customers may need to open another Isa account rather than having all their savings in one place.
Early access issues
Lifetime Isa customers will be able to withdraw their savings when they reach 60 or to fund a deposit for a first property worth up to £450,000. Cash accessed for any other reason will be slashed by a 5 per cent charge plus the return of the bonus and any growth earned on it.
In his Budget speech Osborne hinted the UK could follow the US model where money can be loaned to the saver before being reinvested back into the product at a later date.
It is understood Treasury officials have held talks with providers around allowing penalty-free early access for circumstances other than house purchase.
Life events such as funding care costs for a relative or funeral expenses have been discussed as the kind of occasions that might be deemed exempt from attracting exit penalties.
However, providers are again resisting.
Aegon pensions director Steven Cameron says: “At outset, we don’t support allowing penalty free access for other specific life events.
“The Lifetime Isa is already a radical new savings vehicle with house purchase and saving for retirement the two greatest financial objectives many younger people have. Adding other life events would add further complexity without necessarily boosting savings.
“That doesn’t stop the Government framing legislation to add other events, perhaps focused on social needs, at some future date once funds within Lifetime Isas are more substantial.”
He adds the proposals could confuse savers and calls for adviser charging to be exempt.
“Furthermore, allowing individuals to retain the Lifetime Isa bonus on other life events, but not to allow pension funds to be accessed without penalty in such circumstances would create further differences between these, making it harder to assess which is better.
“We need clarity on how adviser charging will work with the Lifetime Isa. This is one further type of withdrawal which we believe should not affect the bonus or attract an exit charge.”
James says increasing flexibility should not be a priority. He says: “It is important the Government doesn’t lose sight of the fact that savers view Isas as being more straightforward than pensions. Offering a range of early access options risks creating a position where the Lifetime Isa is seen as complex.
“Let’s concentrate our initial efforts on getting the first home option right, and build from there.”
The ABI is also lobbying against a charge cap on the product, echoing its stance when the Government imposed a 0.75 per cent cap on auto-enrolment default funds.
A spokeswoman says the trade body opposes price caps “in general” as “market interventions to cap charges can distort competition, and a flexible charging structure will allow the industry to offer competitive options to customers.”
A Treasury spokesman says: “The Government is engaging with the industry on the Lifetime Isa. Further details will be announced when the Government brings forward legislation to enact the Lifetime Isa in the autumn.”