Concerns over Lisa mis-selling remain as consultation closes

Former chancellor George Osborne had intended the savings vehicles to be available from April this year, but, with the FCA’s consultation response set for March, it is unlikely that many finished products will be available by that date.

Few industry insiders criticised the financial regulator’s focus on five key risks in the November consultation document, identified as complexity, loss of employer contributions, investment strategy, confusion over access rules and tax complications.

Unless I’m investing in something that can beat inflation I might never have enough

Steven Cameron, Aegon

Indeed, the pensions community has for the most part maintained that the Lisa poses a significant threat to the progress of auto-enrolment, and recently, pensions law firm Eversheds has added to concerns, saying that without clearer consumer disclosures and risk warnings, the government is risking a mis-selling scandal.

Cash is not king

Steve Webb, director of policy at Royal London, warned that Isa-style saving is not suitable for retirement. “We know that if you look at all the money that’s invested in Isas across the UK, half of it’s in cash and half of it’s in stocks and shares,” he said, adding that young people are much more likely to hold cash in their Isas.

If people unwittingly lock money away in cash Isas until they retire, the former pensions minister said, they will be sorely disappointed by the lack of investment return.

He added that the risk warnings proposed by the FCA would do little to stop savers choosing unsuitable products, and advocated a default stocks and shares option to be built into all new products.

“We know people don’t read key fact documents,” he said. “It’s got to be up front, in your face.”

Will anyone use them?

If take-up of new Lisa products is low, or limited to well-off savers using them as a ‘top-up’, the strength of risk warnings and safeguards may be of little consequence.

“The number of scenarios where someone is going to come out with a bad outcome will be relatively few and far between,” said David Brooks, technical director at consultancy Broadstone.

Brooks argued that the vehicle is only likely to be used for housing, and even then will probably be a tool for wealthy parents to get their children on the housing ladder.

Webb agreed that extra tax relief via the government bonus for the rich would characterise the Lisa, bringing the policy’s legitimacy further into question.

But he said there was still a possibility that more financially vulnerable savers could be caught out, especially if employers or the government actively promote the products.

“The worry is your average struggling young renter sees TV ads and talks to peers who are opening Lisas towards a deposit – it’s free money, so why wouldn’t you? – but doesn’t have much spare cash so opts out of the pension to free up cash for the Lisa,” he said.

Protect AE progress

Jon Greer, pensions expert at Old Mutual Wealth, agreed that Lisas could push up the currently low opt-out rate in auto-enrolment pensions, meaning savers lose out on valuable employer contributions.

He also highlighted the potential for confusion over the product’s bonus and penalties. Savers are rewarded with a 25 per cent bonus on their contributions, but early withdrawals will be subject to a 25 per cent penalty on the entire fund, meaning the consumer could end up with less than their original investment.

“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,” said Greer.

Furthermore, if savers who withdraw early are invested in a cash Lisa, the lack of investment returns means they are guaranteed a negative outcome, said Steven Cameron, pensions director at Aegon.

The FCA’s draft rules do not preclude the possibility of Lisa products which only offer stocks and shares investment, but Cameron felt this would pose far less of a threat to consumers, as aspiring homeowners with flexible targets might even benefit from investment returns.

“Unless I’m investing in something that can beat inflation then I might never have enough,” he said.

Products not ready

Ultimately however, those with concerns over the products’ suitability will almost certainly have to wait past the government’s April target to see if they are vindicated.

“I still think it’s highly unlikely that there will be any significant number of lifetime Isas on April 6,” said Cameron. “We still don’t have final rules, so anyone looking at launch on [April 6] there’s an element of a leap of faith.”