Anyone wanting to open a Lifetime ISA will be first made fully aware of how the product works and how much it will cost to make early withdrawals, under proposals by the financial regulator.
The Lifetime ISA – or 'LISA' – is expected to be launched in April next year and will allow savers aged between 18 and 39 to put away £4,000/year, with the state adding a 25% bonus on top of annual savings.
The LISA comes with a dual purpose – the money can either be put towards a first home (up to the value of £450,000), or it can be used for retirement (there's more detail about how the LISA will work below).
The Financial Conduct Authority (FCA) has today made a number of proposals designed to ensure consumers aren't misled when they take out a LISA.
This comes just weeks after MoneySavingExpert.com founder Martin Lewis warned that, without clear guidance at the point of application, there could be a danger that savers end up "mis-prioritising their finances".
Giving evidence on the Savings (Government Contributions) Bill last month, Martin told MPs there was a risk some savers could opt out of auto-enrolment pensions and put their money in a LISA instead.
He said only basic-rate self-employed taxpayers would be better off using a LISA instead of a pension, and urged that those applying for LISAs be asked whether they are an employee with access to an auto-enrolment pension.
What is the FCA proposing?
The FCA's proposals primarily focus on the risk of consumers being misled when opening a LISA and potentially mis-prioritising their finances as a result.
In the consultation proposals, the FCA has underlined the need for providers (eg, banks and building societies) to include specific warnings at the point of application to "reflect the dual purpose of a LISA and the restrictions on accessing funds".
These warnings would involve:
- What a LISA can be used for (eg, buying a first home and retirement saving).
- The early withdrawal charge (which will be 25% of the overall value of the LISA) and a warning that someone accessing funds early may get back less than they paid in.
- The process for transferring a LISA to another LISA provider.
The FCA is calling for the warning to consumers at the point of application, which would be provided via an 'initial disclosure document', to outline the consequences of opting out of an employee workplace pension scheme to save for a LISA – those saving into a LISA instead of an auto-enrolment pension scheme miss out on employer contribution payments.
Meanwhile, the FCA suggested potential LISA savers should be shown a table outlining what they can expect to get back from the LISA product by the time they turn 60 (the age at which you'll be able to withdraw cash for retirement penalty-free) – taking into account the 25% state bonus and expected rates of inflation.
Another aspect of the regulator's consultation is the idea of a 30-day 'cooling-off period' after the LISA is opened (which would be 14 days for accounts opened online, by phone or post).
The consultation closes on 25 January 2017.
You must be at least 18 but under 40 when you open one. However, once you've opened an account you'll be able to continue saving and earning the 25% bonus until the age of 50.
What else do I need to know about the LISA?
You can save up to £4,000 a year into the LISA, either as a lump sum or by putting in cash when you can. The state will add a 25% bonus on top every year (up to a maximum of £1,000/year) until you reach 50.
The money can be used towards a first home worth under £450,000, or – once you're over 60 – towards retirement. Withdraw it for any other reason and you'll pay a 25% penalty on the amount withdrawn.
For more information on how it works and who benefits, see our LISA guide.