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Lifetime Isa exit fees are 'overly punitive'

The lifetime Isa has attracted criticism over its chunky exit fees, while some providers will not be ready to launch it next year
September 15, 2016

The government has released further details on the lifetime individual savings account (Lisa) for the under-40s, but the scheme has drawn criticism for the hefty exit penalties that can be imposed on savers.

The Lisa, which is due to launch in April 2017, is designed to help young people save towards buying their first home or retirement. It will allow those aged between 18 and 40 to open a tax-free account to save up to £4,000 a year, and receive a 25 per cent government bonus of a maximum £1,000 per year. Individuals can continue to save and receive the government bonus until age 50.

The pot can only be accessed to purchase a first home with a value of up to £450,000, after age 60, or if the saver becomes terminally ill or dies. The Savings Bill said savers will be hit with a 25 per cent exit charge if they withdraw the money for any other reason. This 25 per cent charge removes the government bonus element, including any interest or growth on that bonus, and incorporates an additional charge of 5 per cent.

However some retirement analysts have criticised the fact that the 5 per cent charge will apply to the individual's whole pot - including any investment growth they have accrued on their personal contributions - not just the government bonus element.

Tom Selby, senior analyst at AJ Bell, says the charge is overly punitive and warns it could eat away a substantial amount of investment growth.

He analysed what would happen if a saver decided to withdraw money for a different purpose after previously contributing the maximum £4,000 over 10 years, thereby saving £40,000. This would have received £10,000 of government contributions, giving a total fund of £50,000. Assuming an investment growth rate of 4 per cent a year, after 10 years the total pot would be worth £62,432.

However, a 25 per cent exit fee on the £62,432 would take out a chunky £15,608 leaving the saver with just £46,824.

"As you're reading through documents, you see the government describes this as a small penalty, but actually when you go through the numbers, the impact it has on the money that you get at the end is quite egregious," Mr Selby says. "I don't think many people would see losing 45 per cent of their investment growth over a 10-year period as a small penalty."

His company is urging the government to reconsider the level of exit penalty before April's launch, but says if the charge is not reformed, savers will need to be absolutely sure they can afford to lock their money away in a Lisa.

He says: "[The exit charge] should be set at a level that enables the government bonus to be recouped, plus investment growth on that bonus, but does not eat into the investment growth achieved on the individual investor's personal contribution."

A number of providers, meanwhile, have warned they may not be able to offer the product in time for the April 2017 launch date. Aegon indicated it will find it difficult to start offering the Lisa by April, while Standard Life said it would be launching the Lisa after next April. Building society Nationwide says it will not be offering the product.

But Hargreaves Lansdown says it will be ready to launch it in April 2017, and Fidelity also hopes to launch one.

"The Lisa will be a much-needed addition to the savings market, although success is dependent on how many providers are available and how competitive the market will be," says Andrew Cheseldine, partner at LCP. "Currently most are not expected to be ready by April 2017."

And further important details need to be clarified before savers know how the Lisa will work in practice.

"The key details, such as authorisation process and definitions of a 'first-time residential purchase', will have a significant impact on the Lisa, but aren't expected for some time," adds Mr Cheseldine.