The Lifetime Isa has launched with little fanfare amid criticism the product will only serve the wealthy and disappointment at the lack of initial appetite among providers.
The Lifetime Isa went live on 6 April, with those between 18 and 40 able to pay in up to £4,000 each tax year, with contributions qualifying for a 25 per cent Government bonus towards their first home or retirement.
Hargreaves Lansdown, The Share Centre and Nutmeg are the only direct-to-consumer investment firms offering the product at the time of writing, with only a handful of other providers planning launches for later this year.
Despite the initial hype, experts remain sceptical on the uptake of the scheme, and argue providers are wrongly considering it as a short-term investment product. They also warn on potential regulatory issues with providers promoting the scheme to unsuitable clients.
Fund Strategy has examined the first available data on Lifetime Isa applications to show what the current business mix looks like and how this could shape up in the future.
The early results
Since the launch of the Lifetime Isa, providers have seen requests come from new clients but have also seen a mix of transfers from their own and other providers’ Isas, especially from Help to Buy schemes.
As of 9 April, The Share Centre said it had opened “several hundred” Lifetime Isa accounts.
The majority of Lifetime Isa customers were new to the firm, with a small proportion transferring monies from existing accounts with the company. No transfers came from other providers.
For Hargreaves Lansdown, which has a 40 per cent market share in online investing, the picture is different. It opened 3,349 accounts in the first 24 hours from launch.
Hargreaves processed a large number of requests and questions about transferring out of Help to Buy Isas from other providers and into the new Lifetime Isa.
A smaller percentage of accounts came from existing clients within other Isas offered by Hargreaves or clients using other services at the firm.
Hargreaves notes 868,000 Help to Buy Isa accounts have been opened since 1 December 2015, showing it was a popular choice for people wanting to climb the property ladder.
Switching to a Lifetime Isa from Help to Buy is advocated by some due to higher contribution limits, earlier bonus payments and the investment opportunities.
But not all providers are able to offer the switch to the Lifetime Isa from other products.
Nutmeg, which saw 1,217 accounts opened on 6 April, says it is still working on “some of the functionality” of the Lifetime Isa and cannot yet accept Help to Buy transfers.
Chief executive Martin Stead says while the importance of employer contributions should not be forgotten, he argues the 25 per cent bonus towards a house offers a reward “unlike any other”, and argues the Lifetime Isa is “flexible in a way that pensions are not.”
The short-term view
Experts say providers should not see the Lifetime Isa as a short-term investment option and expect fewer existing Isa investors to apply for it in the future.
Royal London director of policy Steve Webb says the unintended consequence of the Lifetime Isa might be that it helps wealthier individuals boost their children’s savings.
He says: “What is clear is it feels like a product to be used for the children of the wealthy. This is particularly true given the clampdown on the amount of money that parents can put in their pensions.
“This is not a scheme about helping the struggling renters, it is a tax break for families who already have wealth.”
Wingate Financial Planning director Alistair Cunningham argues it would be misguided for providers to think the Lifetime Isa is just for first-time buyers and says money flocking into the product will come from regular savings, now to be invested in the stockmarket.
He says: “There’s a perception the Lifetime Isa is going to be a short-term investment vehicle and I am not sure it is going to be the case.
“The Share Centre and Nutmeg offerings are particularly inflexible and they are all in investments. This is where it becomes a more prevalent area for the Lifetime Isa and where they can make their money. It will be investment-linked money.”
Architas investment director Adrian Lowcock says the initial hype of the Lifetime Isa can be justified by the perceived simplicity of its rules compared with pension products.
He says: “There’s always going to be an initial bump when launching a new product and in this case with the Lifetime Isa it has the appeal from the first-time homebuyers, but you’ll see less money coming from existing clients. Not everyone is active on day one.”
Supply vs demand
Webb says the appetite for young people to invest in cash creates a conflict as providers are selling more Lifetime Isas with stock and shares options.
He says: “My understanding is the Lifetime Isas opened so far are stocks and shares-based, not cash. From the current Isa system young people are even more likely to have cash Isas than older people so there’s an interesting mismatch here.”
There is also a potential regulatory issue if providers will tend to switch to new Isas for non-sophisticated clients.
“It has the appeal from first-time buyers but you will see less money from existing clients. Not everyone is active on day one.”
Webb says: “If providers encourage people who may not be sophisticated to take that cash Lifetime Isa, perhaps opting out of a pension process, the FCA is going to start wondering if that is the wrong product for them.”
Among a number of other providers, AJ Bell says it will look to offer Lifetime Isas in June across both its adviser platform and direct.
The firm expects demand to come from Help to Buy transfers and existing Isa funds as well as new clients.
An AJ Bell spokesman says: “The benefits of pension tax relief and employer contributions to workplace pensions should not be forgotten and providers will rightly have to provide warnings around the risks opting out of your workplace scheme in favour of a Lifetime Isa.”
‘A slow build’
But commentators are disappointed at the lack of providers offering the Lifetime Isa, especially in the advised platform space. Transact, which is the only advised platform offering the Lifetime Isa so far, received just 16 applications on 6 April.
A Transact spokesman says: “We see the Lifetime Isa as part of our service proposition, enabling advisers to fulfill thorough financial planning for their clients and their families.
“We have had lots of inquiries from advisers who will discuss with their clients as appropriate. We certainly don’t expect a big rush of new Lifetime Isas – it will be a slow build.”
Cunningham says it is “very disappointing” to see only a few entrants to the Lifetime Isa market and even more disappointing there are so few advised options.
But Webb notes the Treasury has been surprisingly quiet in promoting the Lifetime Isa at launch, suggesting this could be “a sign of failure”.
He says: “Providers are not releasing great numbers, and although it is early days take-up might not been that great, so the Treasury might be seeking to distance itself from the launch of Lifetime Isas.”
Keeping it in the family
Advisers are switching on to intergenerational wealth planning as parents and grandparents feel ever-increasing pressure to share the baby boomer wealth. So the introduction of the Lifetime Isa could be significant for advisers who are serious about family financial planning.
Transact is the only adviser platform to offer the Lifetime Isa from 6 April. The platform makes it cost-effective to hold a Lifetime Isa because it facilitates the family linking of accounts. The average Transact account is a portfolio of around £188,000 and the Lifetime Isa maximum annual allowance and maximum bonus equates to £5,000 each tax year. So in the first year, the platform charge on a family-linked portfolio of £193,000 in an Isa wrapper would be 0.30 per cent.
If the adviser opened an individual Lifetime Isa account on Transact, the annual charge on £5,000 would be 0.5 per cent on the assets and a £12 Lifetime wrapper charge, which equates to 0.74 per cent. So in a family-linking scenario, which Transact expects to happen in virtually every instance, the Lifetime Isa holder pays an annual platform charge of £15 rather than £37.
The lack of availability on direct platforms and through banks is disappointing. But is it that odd that we have not seen a flurry of adviser platforms making the Lifetime Isa available? After all, the average advised client is not under 40 and saving for their first home.
Lack of clarity over the final rules until very late has not helped adviser platforms to launch (or anyone else for that matter). Gaining regulatory approval has also been a protracted process: we are told six months is the minimum length of time.
This product is not going to drive significant flows to platforms but for advisers serious about holistic family planning, it should be an important product in the financial planning arsenal. Many believe the biggest demand for the Lifetime Isa will be from wealthy parents opening accounts for children. For
adviser platforms, why have that cash go to a D2C platform when you can keep it in the family?
Miranda Seath is senior analyst at Platforum