The Lifetime ISA launched on Thursday but with only three of the intended providers on board, as major banks and building societies have pulled out for the time being.
The three providers who are offering LISAs from the intended launch day will be offering stocks and shares options only; as of yet no one can get a cash LISA.
The road to the launch of the Lifetime ISA has been a rocky one, with providers complaining about a lack of clarity regarding various terms and conditions associated with the accounts.
The LISA is a product designed to be used to save up for either a deposit on a house, or for supplementary post-retirement income. Account holders will benefit from a 25% government bonus every year (up to a maximum of £1,000 each year), but face penalties if the money is withdrawn before they reach the age of 60 and used for anything other than a deposit. The penalty amounts to 25% of the total account balance at the time, meaning that not only is the initial bonus relinquished, but the account holder would end up with a net loss.
These harsh penalty fees are just one of the issues that have been raised with regard to the LISA, by potential providers and also by various other commentators, including former pensions minister Baroness Ros Altman.
The broader issue is one of complexity. The Lifetime ISA is a complicated product, the respective benefits and pitfalls of which mean that the chance of mis-selling is high. Used to save up for a deposit on a house, the LISA works in much the same way as the Help to Buy scheme. In this case, the 25% bonus is certainly useful, and is a good deal. In fact, the LISA can offer much better overall returns than a Help to Buy ISA – a maximum £32,000 government bonus against £3,000.
However, if used a post-retirement income the bonus can be deceptive. As Altman explains, there are little to no benefits to using a Lifetime ISA instead of contributing to a pension.
She said, writing for ThisisMoney.com: “The 25 per cent Government bonus that is added to your savings will work out at exactly the same as 20 per cent pensions tax relief, so you will not get any more money in a Lifetime Isa than you would in a pension.
In fact, she added: “Pensions give you much more than just a 25 per cent bonus. Workplace pensions can give you extra money from employer contributions, higher rate tax relief and National Insurance relief.”
The FCA has already said that they want to make sure that providers are issuing sufficient warnings to potential LISA holders, but this has not been enough to dissuade naysayers from warning about probably mis-selling.
As a result, many major banks and building societies have said they are pulling out of offering LISAs altogether, with others delaying their offerings for an indeterminate amount of time.
Currently, stocks and shares LISAs are available from Nutmeg, Hargreaves Lansdown and Share Centre. Cash LISAs will be available from other banks and institutions within coming months.