Money Marketing reports that former pensions minister Ros Altmann has joined a growing number of industry voices who are critical over the way the Government plans to apply penalty charges on the proposed Lifetime Isa.
Last week the Government confirmed the scheme will be rolled out from April and will allow individuals aged between 18 and 40 to save up to £4,000 a year. The Government will top up their accounts with a 25 per cent bonus, to a maximum of £1,000.
The Treasury clarified the bonus will be paid monthly, rather than at the end of the tax year as first planned. Monthly bonus payments will come into effect from 2018/19.
As with regular ISAs the money can be put into either cash accounts or stocks and shares , with savers able to pay into the product until age 50.
Withdrawals can be made to buy a first home or from age 60, or if a saver becomes terminally ill but withdrawals for any other purpose will attract a penalty charge of 25%.
Treasury documents state: “Account holders will be able to make withdrawals at any time for other purposes, but with a 25 per cent Government charge applied to the amount of withdrawal. This returns the Government bonus element (including any interest or growth on that bonus) to the Government with a small additional charge applied.”
The Treasury told Money Marketing that individuals who make a loss on their investments, will still have to pay the charge if they make an unauthorised withdrawal.
Former pensions minister Ros Altmann says this exit charge is “punitive”.
She says: “As it is an Isa, savers may think it is straightforward. I believe it could end up as another huge mis-selling scandal, when workers are enticed out of their company pension schemes into what looks like a tax-free savings account which they can take money back from if they need it.
“They will then realise they have lost their employer contribution, lost out on higher rate tax relief and end up having to pay big penalties if they do actually withdraw.”
Altmann has previously called for the Lifetime ISA to be scrapped, and still believes it is “a dangerous product”.
Aegon pensions director Steve Cameron says: “While some people might think 25 per cent taken off on exit just cancels out the 25 per cent added on the way in, it goes further than that. In today’s low interest rate environment, you’d be lucky to get more than 1 per cent interest on a CASH ISA, so the £250 additional penalty could easily wipe out five years of interest.”
AJ Bell senior analyst Tom Selby believes the penalty for those who invest in the stocks and shares Lifetime Isa could be “horrific”.
He says: “People need to be aware of what they are getting into as it is not a product that caters for changing circumstances. If savers want flexibility, it is probably not for them given the severity of the penalty.”
However, a Lifetime ISA is certainly another tax advantaged saving scheme that should be considered for those that are eligible. If you would like to discuss if it would fit into your own investment portfolio when it is launched, please contact us >>