By Tom Murray, Head of Product Strategy, Exaxe.
The committee heard a lot of criticism of the product over the LISA’s complexity, lack of fit with other pension products and its “apparent” lack of popularity with the industry and pension savers. This led them to deduce that there is no role for the LISA in the UK’s savings landscape.
This view appears profoundly misplaced. It panders to industry critics without ever grasping the benefits of the product to savers nor why the take-up has been disappointingly low.
Taking their issues in order, they believe that the product is very complex. Yet in truth, the LISA is the essence of simplicity. Put in up to £4000 each year until age fifty, invested in equities or cash, and the government will award a 25% bonus. Then one can either withdraw it penalty free for the purposes of buying a first home or for any reason after the age of 60. One can also access the money at any time, but there is a 25% penalty on the whole withdrawal.
Yet in the report, the committee bemoans the fact that the majority of the public do not understand tax incentives for pensions. They recommend that the Government promote understanding of tax-relief as a bonus or additional contribution. As this is precisely what the LISA does, it seems to be a contradiction to attack the one regulated product that actually is in line with their recommendation.
Similarly, it is hard to see why they feel there is no place for the LISA. Experts claimed that there were products in place for pensions and house saving (the Help to Buy ISA) and therefore a combined one was confusing. This seems to overlook the key point that those on lower incomes might be demoralised splitting their small amount of income across multiple products, which would probably cost more in charges and would certainly result in many smaller pots rather than a single big one. This is important for morale as multiple small saving pots would be less likely to incentivise a saver than a bigger one that lets the saver feel they are making progress in building wealth.
It also might encourage more of the self-employed to save for the future, knowing that they can access their LISA money in an emergency, unlike standard pension savings.
Finally, there’s the issue of why take-up is so low. The written evidence received by the committee stated that it was unpopular in the financial services industry with few providers have supplying it. If supply is low and few providers are actively marketing the LISA, it’s hardly surprising that the take-up by customers is limited, thus any conclusions drawn from that are bound to be fallacious. The committee seems impressed by the fact that the Pensions Advisory Service received no questions about it, proof they believe of limited take-up. They never seem to consider that this might well be evidence contradicting their earlier assertion of complexity, i.e. the public require no assistance with the product at all as they understand it.
It cannot be coincidence that the two experts most quoted by the committee are the previous pension ministers, Sir Steve Webb and Baroness Altman, both closely associated with the policy of auto-enrolment and against the introduction of the LISA as a distraction to their main project. Their criticisms must be viewed through the prism of their desire to protect their legacy in the pension’s world.
The Treasury Committee, usually standard-setters among the select committees for producing unbiased, cross-party reports, have produced a flawed report. In their eagerness to push the government into action, they have even skipped briskly over the fact that in long-term saving, constant changing of the rules is always counter-productive and withdrawing a new regulated product so quickly will undermine consumer confidence in any further initiatives that the government make.
The Lifetime ISA is a clear and easily understood product that has lots to offer younger savers, who don’t want to be forced to make a choice and ring-fence their savings into a pension at the expense of possibly being able to get on the housing ladder at some stage in their career. The problem of savings being locked in pensions is already being recognised, hence the committee approves of the trial of ‘sidecar’ savings in the auto-enrolment system, a hybrid product that allows people to access some of their pension pot in the event of emergency.
The LISA is a great product that needs some more innovative thinking from the Government, such as working out how to link it into the auto-enrolment system, and a lot more promotion from the industry. Improvement, not abolition, should be the way forward.
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