The Financial Conduct Authority (FCA) has recently voiced concerns that new Lifetime Individual Savings Accounts (LISAs), due to launch next year, could be putting some savers at risk if the product is not fully understood.
LISAs are being sold as a way to earn bonuses if the money put into them is put towards the purchase of a home or saved for retirement. However, the FCA believes that warnings should be clearly communicated to consumers to protect them from the risks which have been less well publicised.
Amongst the key issues the FCA feels needs to be made clear are the difference between saving with a LISA and saving into a pension product, and the early exit charges that savers may be subject to with a LISA. They also believe providers should offer the right to cancel for thirty days after the sale of a LISA.
The benefits of the new savings product have been well publicised. Both cash and stocks and shares LISAs will be available to savers aged between 18 and 40, allowing them to save up to £4,000 annually, with whatever they save boosted by an extra 25% from the government. This could result in up to £32,000 of bonuses in addition to any investment return earned.
However, the bonus can only be redeemed if the money is used to buy a first home, or if the saver waits until they are over 60. If the money is withdrawn without meeting either of these criteria, the bonus is sacrificed along with an additional charge of 5%. The FCA has outlined the potential losses incurred if money is withdrawn early. For example, putting £4,000 into a LISA in the first year, then withdrawing it again in the second, could potentially cost you £250 in charges with no investment return.
Amongst the FCA’s other concerns are the fact that investors may not fully understand how a LISA differs from a pension, as well as the potential to lose out on employer contributions if a switch is made from a pension to a LISA. As further contributions to the new accounts will not be possible once the saver turns 50, they will need to make alternative arrangements for their savings after this point. After a ten week consultation on all of the FCA’s suggestions, new rules will be put in place before LISAs become available in April 2017.