Draft Lisa rules attempt to prevent AE opt-outs

The consultation portrays the controversial addition to the Isa family as a useful savings tool, but outlines five key risks that should be addressed by any new products.

If the paperwork sent to customers is too impenetrable, customers will still be at risk of buying this and being worse off in retirement

Ros Altmann, former pensions minister

Complexity, loss of employer contributions, investment strategy, confusion over access rules and tax complications were all highlighted by the paper.

Introduced by former chancellor George Osborne in this year's Budget, the Lisa has been dogged by concerns it will prompt opt-outs from a largely successful auto-enrolment regime. Some even speculated it might be dropped by Philip Hammond.

Providers face a challenging deadline

With the FCA’s publication of draft rules, the policy looks set to go ahead, although some providers have expressed concerns that products may not be ready by the government’s target of April 2017, especially if any changes are announced in the Autumn Statement.

“I think it’s unlikely we’re going to see significant changes or the policy being scrapped,” said Tom Selby, senior analyst at investment platform provider AJ Bell. “[Changes] would make the April implementation date very difficult.”

The consultation will close on January 25 next year, with the final rules published in March.

Steven Cameron, pensions director at provider Aegon, said: “Many providers will struggle to have their product up and running from day one.”

Complexity poses a threat

Confusion over the benefits and drawbacks of saving in a Lisa are a key theme in the consultation, which warned: “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.”

Under the proposed regulations, providers will have to make savers aware that if they choose to opt out of their pension scheme in favour of a Lisa, they will swap their employer’s matching contributions for a 25 per cent top-up from the government.

That distinction was welcomed by Ian Neale, director at pensions intelligence provider Aries Insight, who argued that the Lisa should not be considered purely an alternative to a pension.

“It should be remembered that the Lisa is a dual-purpose long-term savings vehicle, and much more attractive than a pension if used to save for a house purchase,” he said.

The FCA rules also include a requirement that disclosure materials include a table illustrating the possible outcomes for savers withdrawing their money at different ages.

Former pensions minister Ros Altmann said the Help to Buy Isa could easily have been upgraded to fill the housing objective of the Lisa, and questioned the efficacy of risk warnings.

“The fact is that, even with risk warnings, if the paperwork sent to customers is too impenetrable, customers will still be at risk of buying this and being worse off in retirement,” she said.

Are savers aware of investment risks?

Consumers will also need to be aware of the impact of an early exit charge if the Lisa is to be a success. Early withdrawals will see a 25 per cent charge levied on the entire fund, or a 6.25 per cent cut of the saver’s original investment.

“This is a vehicle for two things, and if you don’t use it for those things you are going to be penalised,” said Jon Greer, pensions expert at Old Mutual Wealth. He argued that this concept was probably borrowed from the pensions system.

Instead, he saw lack of clarity over investment risk as being a major threat to successful implementation of the Lisa.

Many experts have said the uncertainty over when savers will access their funds means the savings will have to be held in cash, foregoing investment returns.

If the pots are invested, there may be little public awareness or appetite for the negative growth that could occur. “That’s just going to leave a bad taste in people’s mouths,” said Greer.