Word on the web: Lukewarm welcome for first cash LISA

Skipton Building Society has recently become the first provider to offer savers a cash LISA but commentators have raised concerns about the merits of the product in general
by Eila Madden 

Lifetime Individual Savings Accounts (LISAs) have been on the market for several months now, but only as a stocks and shares product. But Skipton Building Society has recently become the first provider to offer a cash LISA, although its 0.5% interest rate has raised some eyebrows. 

Moneywise’s Adam Williams points out that the rate is well below those offered for standard cash ISAs and Help to Buy ISAs. He said the AA currently offers the top rate of 1.01% for an easy access cash ISA, although that includes a 0.76% bonus that ends after a year, and Barclays leads the Help to Buy comparison tables with a 2.27% rate. 

Former Chancellor George Osborne launched tax-free LISAs in 2016. Targeted at 18 to 39-year-olds, the product encourages savers to put aside a maximum of £4,000 a year in cash for their first home or retirement. 

Some commentators have suggested Skipton's interest rate for its cash LISA is not competitive enough
To persuade account holders to keep the savings habit, the government offers an annual bonus amounting to 25% of the total saved each year. As an extra carrot, the Skipton is offering £250 cashback to account holders who go on to take out a mortgage with the building society.

Savers can continue depositing into the LISA until they’re 50 and, if saving for retirement, can’t access the cash until they’re 60. The downside? Early withdrawal for anything other than house buying will incur a penalty fee of 6.25%.

MoneyComms’ Andrew Hagger told Williams that the Skipton’s 0.5% rate was “pretty paltry”. He added: “At the moment there are no other cash LISA providers so without any competition to worry about, Skipton knows it doesn’t have to offer a generous rate as potential house buyers will snap up the product purely because of the generous government incentives.”

Moneywise article

No competitionThis is Money’s Lee Boyce reported that a number of big banks have said that they will not be launching cash LISAs this year. Hagger, also quoted by Boyce, told the publication that the lack of competition is frustrating and called on the government to look at why other banks and building societies are reluctant to sign up. 

“Maybe it’s down to the cost and complexity of setting up and monitoring the accounts so that they are utilised as per government guidelines,” he said.

Kris Brewster, head of products at the Skipton, told Boyce that launching the cash LISA is just another way that the building society can continue to support customers in planning and preparing for their life ahead.

But Rachel Springall, a finance expert at Moneyfacts, said that while some savers might not feel comfortable buying a stocks and shares LISA, those saving for retirement would be better off doing so as it could offer a higher return over the longer term. 

Others have also said that the cash LISA might not be the best retirement saving option. Boyce notes that, while welcoming the cash LISA, the Association of British Insurers (ABI) has warned that it must not undermine the success of automatic enrolment into workplace pensions, which offer people the benefit of ‘free money’ from employer contributions and tax relief. 

This is Money article

Pension concernsThe ABI has good reason to be concerned. Reporting on the Skipton’s product launch, FT Adviser’s Damian Fantato cites a survey from CoreData that reveals 34% of those planning to invest in a LISA will cut the amount of money they put into their pension, while 7% will stop saving into it altogether.

Fantato said these findings have triggered growing concerns that LISAs could be “the next misselling scandal on the horizon”.

Former pensions minister Baroness Ros Altmann is one such critic. She has said that in the new era of pensions freedoms, the LISA will not be as beneficial as a pension. “In my view, LISAs risk poorer pensioners in the future. Just think about it from a customer’s perspective. The LISA isn’t a simple product. It needs somebody to understand the whole environment.”

While a free 25% government bonus sounds tempting, the lack of high street competition, and concerns about the impact on workplace pensions, suggest that the LISA is going to have a bumpier start than the government had hoped for.

FT Adviser article
Published: 09 Jun 2017
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