The Financial Conduct Authority (FCA) consultation on the impending lifetime ISA closed on Wednesday, but with the product set to launch on 6 April, it looks like Hargreaves Lansdown will be one of the only big name provider leaping straight in.
So what are the rest waiting for? In a word: reassurance.
Opinions on the lifetime ISA are divided among providers, platforms and brokers, although many are intending to develop the product. The vast majority are opting to see how the market reacts, and what the regulator settles on after its first year of distribution.
Hargreaves has been a consistent proponent of the lifetime ISA and will be launching its own in April through its low-cost account Vantage. Head of communications and chartered financial planner Danny Cox said: ‘There will be interest in the lifetime ISA and therefore it’s important we offer this as a Hargreaves Lansdown product and service at the earliest opportunity.
‘The benefits of tax wrappers are cumulative, so the earlier people are able to invest, the longer they enjoy the tax breaks and the greater the potential for compounding their tax-free returns.’
The two major concerns about the lifetime ISA have been its potentially detrimental effect on auto-enrolment and the 25% withdrawal charge. Confusion over how the product fits within the broader spectrum of savings, and how this will be communicated to consumers, has providers and commentators on tenterhooks.
Former pensions minister and Conservative peer Ros Altmann (pictured below) has warned at length in the House of Lords that the lifetime ISA risks becoming a new mis-selling scandal in the coming years.
Old Mutual Wealth has no plans to offer the product, but will be ‘keeping a watching brief on demand from advised clients,’ as customer use of it becomes clearer, product director Gower Wisdom said.
‘As a hybrid product, the lifetime ISA is confusing and it is not clear who it will serve. Part of that has to do with the number of ISA products available, but more worryingly, it doesn’t function exactly like an ISA, it’s a hybrid product,’ he said.
‘The lifetime ISA has a hefty 25% early withdrawal fee. The fee makes sense as an incentive to use the product for its original intention, but it means the product isn’t simple like an ISA. This mixes a lot of complexity into what has previously been a simple and successful brand.’
Rachel Vahey, product technical manager at Nucleus Financial, said it would be looking to offer a lifetime ISA, but regulatory loose ends needed tying up first.
‘There are so many unknowns around the product, as it has been a quick piece of legislation and the consultation on regulation has only just finished,’ she said.
‘We are still waiting on final details: how it will be sold and communicated. We want to work in the background and monitor developments before launching anything.
‘It will be a valuable savings vehicle for some people but making sure the right people are buying it at the right time and with the right information is the tricky part. People need to have the right information about what sort of product it is,’ Vahey said.
‘It is not really an ISA as it doesn’t have the flexibility, so there is an element of confusion, and it is not a substitute for a pension either. Understanding where on the savings spectrum it sits is going to be crucial.’
Fidelity International plans to launch a lifetime ISA during the tax year, but it will not be ready in April. Head of pensions policy Richard Parkin (pictured above) expressed concerns over the consumer backlash providers could face over the government-imposed exit charge.
‘It is a great product for consumers. Anything that gives you free money from the government is difficult to argue with, so we support it,’ he said. ‘As a financial provider, we are concerned about the penalties. No matter how many times you tell people there are charges for early withdrawal, when they come to take the money out and get hit with a penalty, many of them won’t remember that discussion.
‘I am concerned it will be seen as a provider penalty when it is a charge imposed by the government, which could be damaging for us.’
Parkin was not the only provider to express concern over the exit charges, with even those advocating the lifetime ISA concerned about the size and scale of the fee.
Pray for pensions
Charlie Musson, spokesman for AJ Bell, shared Parkin’s concerns. ‘The two major lifetime ISA risks are people quitting their workplace pension in favour of a lifetime ISA, hence missing out on valuable employer contributions, and investing without being aware of the implications of the exit penalty,’ Musson said.
‘The exit penalty is too high in our opinion and we would like to see it reduced to 20%, so it is just reclaiming the government bonus and growth on the bonus. These two risks need reviewing once the lifetime ISA is live to ensure it is delivering good customer outcomes.’
The most common concern across the market since the lifetime ISA came to the fore has been possible damage to auto-enrolment. This will tie into the FCA’s consideration of how the product is marketed and sold.
The industry is clear: the message must be communicated to every potential consumer that workplace pensions are a significantly better long-term savings vehicle, due to employer contributions and a number of other aspects. This responsibility will be shared by the government, the regulator and advisers.
Alastair Black (pictured above), head of financial planning propositions at Standard Life, said the regulator had taken the right approach to this so far.
‘While we won’t be offering the lifetime ISA from April, we do intend to launch it at some point in the future,’ he said. ‘We have deferred our decision on launch until we have clear rules from HM Revenue & Customs and the FCA [which is still under consultation], and until we have reviewed how customers engage with this product.
‘The risk is it drives some incorrect behaviour in people, using the lifetime ISA instead of auto-enrolment. But the FCA has picked that up and is doing the right thing. It is consulting on that and hopefully they will come out with some guidance that will mitigate that risk,’ Black said.
Black highlighted that the lifetime ISA opens up new possibilities for the advice profession through its engagement with younger clients who have enough assets to warrant advice, over reconciling the product with an existing workplace pension.
‘For people that have substantial sums of money, if the lifetime ISA pushes them towards getting advice, that’s a good thing because they’ll realise all the other benefits an adviser can offer,’ Black said.
‘They will probably get better outcomes and be helped to do things they were not even aware of. If it means people start to engage with long-term saving in their 30s and haven’t done previously, it’s a fantastic opportunity for the adviser to help them plan for their future.
‘There are other services advisers can help consumers with. They just need to get them through the door and if the lifetime ISA leads to an increase in people seeking advice, that’s brilliant,’ he said.
As well as the potential for expanded engagement with the population, opportunity could come from within, in the form of increased asset retention rates. Providers, advisers and policymakers are looking ahead to a large wealth transfer from the baby boomer generation to their millennial offspring.
It would be a shame for IFAs if clients’ children or beneficiaries took their money elsewhere. An early consultation on the lifetime ISA with an heir in their 20s who inherits the assets of a longstanding client could plant the seed for a lifelong continuation of business.