24Nov

The Financial Conduct Authority (FCA) has opened a consultation regarding its proposed rules for the promotion and sale of the Lifetime ISA (LISA), which will be available to savers from April 2017.

Anyone under the age of 40 will be able to open a LISA. Contributions of up to £4,000 per individual per tax year can be made up until the age of 50, and the Government will top up any contributions by 25%, known as the ‘government bonus’. The product is designed to allow savers the choice of using the funds to either purchase a home, or save for retirement. If the funds are withdrawn before age 60, and are not then used for the purchase of a home of up to £450,000 in value, then a 25% penalty will be applied.

LISA contributions can be invested in cash, stocks & shares or a mixture of the two. The £20,000 overall ISA limit will remain in place, so savers who take out a LISA will still be able to contribute up to £16,000 to other forms of ISA in the same tax year.

The first thing that the regulator is anxious LISA savers understand is the potential to lose money if they don’t use the funds for a home or for retirement. Firms will need to ensure clients understand that if they contribute £4,000, have it topped up to £5,000 via the Government bonus, then withdraw the £5,000, the penalty will be £1,250 (25% of the total amount), leaving them with a final total of £3,750 and a loss of £250.

Other factors that must be explained to LISA clients include:

• If they choose to contribute to a LISA instead of a workplace pension, then they will lose the employer pension contribution
• How a LISA can be transferred to another provider
• The range of investments available within a LISA

Other areas of concern flagged up in the FCA paper include:

• Investors may not understand the differing features of a LISA and a pension plan, and may thus be unable to make an informed choice between the two
• Investors may not realise that, while access to a LISA for retirement purposes cannot occur until age 60, personal pension plans allow access at a slightly younger age
• Investors may not understand that higher rate tax relief, available at 40% on a personal pension plan to those earning in excess of the relevant threshold, could be more generous in real terms than the LISA government bonus.

As with other types of investment, LISA clients will need to be provided with an indication of what investment returns they might receive, and what the charges on the contract are. For many existing products, this is done via a personalised illustration or similar.

The regulator is proposing that clients have a 30-day cancellation period, except where the LISA is opened as a distance contract, in which case the cancellation period will be 14 days.

The consultation closes on January 25 2017.

It had been reported that the Lifetime ISA might not proceed, given that some well known providers had chosen not to offer it. In addition, the Chancellor who announced the scheme, George Osborne MP, is no longer in the role, but it appears that the Government remains committed to the initiative.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.