Unveiled by former chancellor of the exchequer George Osborne in the 2016 budget and launched on 6 April, Lisas will be allow savers to pay in up to £4,000 ($4,983, €4,634) a year, with a 25% government bonus on contributions.
“As a retirement planning tool, the Lisa could be viewed as a supplement to pensions, but certainly not a replacement. Higher and additional rate tax-payers are still able to claim further relief via pension contributions over the 25% top-up available within a Lisa, as well as being able to access their pension fund from the age of 55 rather than 60,” said Smyth in a statement on Wednesday.
Restrictive conditons
However, he warned that advisers need to make their clients aware of the restrictive conditions of the product which include potential charges for withdrawing funds outside strict conditions, inheritance tax implications (IHT) and in some circumstances, “negligible benefits over effective pension planning”.
“The Lisa remains subject to normal Isa rules and would be included in any estate calculations for IHT, unlike pensions. Funds from Lisas must also be drawn from one of two scenarios to avoid penalties which undermine the effectiveness of the vehicle” explained Smith.
The money in a Lisa can only be taken out to be used in the purchase of a first home, up to a value of £450,000, or from age 60. Remaining cash from a house purchase using the product are then rolled over until age 60.
Withdrawing funds outside of these two scenarios will result in an encashment penalty of 25% on the funds drawn, said Smyth, urging advisers to “be reasonably assured” that clients for the right reason.
UK regulator, the Financial Conduct Authority (FCA) has warned about the risks of imposing a 25% exit fee, arguing it may compromise consumer protection.
No income tax or CGT
“That being said, the Lisa does have a significant advantage over pension funds in that drawings, provided they meet with the previously mentioned criteria, do not attract income or capital gains tax which would create a very tax-efficient pool of savings in retirement. For those able to contribute to both a pension and a Lisa as part of their retirement plan, the advantages are clear,” he concluded.
Smyth’s comments come as just four UK providers have signed up to launching a Lifetime Isa, which include Hargreaves Lansdown, The Share Centre, AJ Bell and Nutmeg.
No other major life companies, platforms, banks or building societies have committed to a launch date, with the majority yet to confirm whether or not they will offer a Lisa at all.
Hargreaves launch
Hargreaves Lansdown announced on Wednesday that its Lisa product is likely to be the first on the market, with applications opening in the “early hours” of Thursday 6 April.
