HMRC and HMT have recently passed draft legislation amending the Individual Savings Account (ISA) Regulations to establish the Lifetime ISA (LISA). The FCA has also issued a consultation paper around the warnings they expect firms to have in their LISA literature, including around the promotion and distribution of the product - CP16/32 "Handbook changes to reflect the introduction of the Lifetime ISA".
The consultation period ended on 25 January 2017 and a policy statement is expected during the first quarter of 2017. Lifetime ISAs are due to launch in April 2017.
Lifetime ISAs allow savers to save up to £4,000 a year with a 25% Government bonus on contributions. Funds are intended to be used to buy a first home worth up to £450,000 or can be accessed from age 60 or in the event of a terminal illness. Withdrawals for other reasons will carry a penalty charge of 25% on the whole fund, including any growth. There has been much discussion and concern in the industry about these penalty charges.
The FCA has stated that investors will need information about how a LISA works, e.g. on eligibility, Government bonus, early withdrawal etc, and that firms will have to bring to investors’ attention the benefits of holding an appropriate mix of assets; also that a 30-day cancellation period should apply on opening. FCA has been quite specific too in stating that warnings should include the fact that incurring the early withdrawal charge could mean that investors receive less from their LISA than they have paid in, and that they could potentially be losing an employer contribution to a workplace pension to which they may be entitled if they choose to invest in a LISA instead.
Many commentators have stated that, because of the similarity of the LISA to a pension, and the fact that it is not a pension substitute, LISAs should only be distributed on an advised basis, and OAC tends to agree with this view. There are also concerns about young people saving for a property and then not being able to buy one and being locked in until age 60. In reality the product is not very good for saving for a deposit on a house unless near the maximum is saved for a few years at least. We can see the difficulties of explaining all this in a Key Features Document or eventually in a Key Information Document. The main message is that you need to give appropriate warnings and be careful to whom and how you distribute it.
OAC is able to help if you have any concerns about your literature and/or your approach to the distribution of LISAs.
For more information
Roundup and Commentary: Lifetime ISA (LISA) legislation
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