On Tuesday we posted a blog by Mark Grimes, where he discussed the 5 considerations consumers must make when choosing between investing additional contributions in either their pension, or the previously announced Lifetime ISA. Yesterday the FCA released a consultation paper, CP16/32 Handbook changes to reflect the introduction of the Lifetime ISA, raising risks for investors relating to the introduction of the Lifetime ISA, and the additional complexity this causes consumers.
Below is the extract from the paper, points 2.7 and 2.8:
Risks for investors
2.7 The LISA is part of the broader ISA wrapper range. Our regulation of ISA wrappers is largely based on the underlying investments rather than the wrapper itself. However, there are additional features of the LISA wrapper that mean some risks are attached to the wrapper and not the underlying investment.
2.8 The LISA combines elements of a short-to-medium-term deposit based savings product with a long-term retail investment product. We believe this combination – together with the early withdrawal charge – presents a number of risks to our objectives, particularly our consumer protection objective. These risks fall into the five broad categories below:
- Investors may not understand the purpose, features and restrictions of a LISA, as these are more complex than the existing cash ISA and stocks and shares ISAs.
- Investors may not sufficiently understand the differences between the features of a pension and a LISA in order to make informed decisions about the benefits and risks of each for their own circumstances.
- Investors may lose out on an employer’s pension contribution if they opt out of a workplace pension in favour of saving in an LISA.
- Investors may fail to upscale ‘other’ savings upon reaching 50, when they cannot make any further contributions to a LISA.
- Investors will need to make investment decisions in line with their objectives and the investment strategies are likely to need to be different for saving for a deposit for a first home and saving for retirement.
- Investors may remain invested in an inappropriate asset mix – e.g. they originally intended to use the LISA to save for a deposit to buy a home and later decide to use it to provide retirement savings
- Investors may not realise that, while they will be able to withdraw all of their funds from a LISA when they reach 60, they will be able to access funds accumulated in a personal pension at 58.
- Investors may not fully understand the impact of the early withdrawal charge (see Table 1 below) and any additional charges that providers may levy.
- Investors may not fully understand risks around any absence of Financial Services Compensation Scheme (FSCS) protection and limitations of client money rules.
- Investors may not be able to compare the Government bonus with tax relief on pensions and higher rate taxpayers (with remaining available capacity for tax relief on pension contributions) may, therefore, not optimise their retirement savings from a tax perspective if they choose to invest in a LISA rather than a pension.
- Investors may not understand the difference in how the proceeds of a LISA and a pension are taxed.
The warning about potential consumer risk from the FCA is a reminder that for more complex products where both tax and product features affect the outcome an assessment of the consumer’s position is important.