Lifetime Isas allow under-40s to save for a home and retirement at once, and the Government is offering free top-ups worth up to £32,000 if you max out your fund during your younger to middle-aged years.
That sounds like a big giveaway, but these Isas have sparked a barrage of criticism, amid fears younger savers could make poor financial decisions and be left out of pocket in the longer run.
Watchdogs have insisted on robust safeguards, including making providers issue risk warnings before accounts are opened.
We look at how Lifetime Isas works, what types of products are available, and their benefits and pitfalls.
Ros Altmann: ‘This product is masquerading as a pension, and will confuse workers who may opt out of much better workplace pensions’
‘One, saving for your first home? Lifetime Isa is the first choice for 18-40 year olds. The Lifetime Isa gives first time buyers a 25 per cent bonus of up to £1,000 a year towards getting on the housing ladder.
‘No other Isa offers as generous a government top up. The Help to Buy Isa offers a 25 per cent top up, but the maximum amount you can save is more limited and the bonus isn’t paid until completion of a property purchase.
‘Second, saving for retirement? Look at a workplace pension first. A Lifetime Isa can be used to save for retirement, however a workplace pension should be the first port of call to pick up valuable employer pension contributions.
‘Third, consider transferring your Help to Buy Isa to a Lifetime Isa. The Lifetime Isa offers higher contribution allowances, the option to build a bigger deposit by investing rather than just saving in cash, and a more immediate bonus payment, all of which suggest the Lifetime Isa is the preferable option for investors in the target age range.’
Paul Waters, partner at pension consultant Hymans Robertson, said: ‘The best long-term savings vehicle for retirement is the pension and people should stick with that. But the Lifetime Isa would help get people in the savings habit.’
He went on: ‘People can withdraw funds for a house deposit and continue to invest for long term retirement saving. Our view is this will not be common behaviour, certainly for the employed who have a workplace pension option.
‘Most people buying their first home will take all of the saving to help fund the deposit, and if your sole saving purpose is then retirement saving we would expect people to use a pension product instead.’
But Waters added that the biggest danger with almost any financial product with a long term duration, which you see time and again, is that people make their decisions about it at the outset, but market conditions and personal circumstances change.
People then don’t get any ongoing guidance or support, and so just carry on for years, perhaps putting away £50 a month when it no longer makes financial sense, he explains.
Waters noted that while the Financial Conduct Authority has decided Lifetime Isa providers must issue risk warnings – which he commended as both proportional and helpful – most of the problems that develop will do so over time and so they won’t address that.
