Experts at Milestone Financial Planning are supporting a consultation paper by the Financial Conduct Authority (FCA) ahead of the introduction of the new Lifetime ISA in April 2017.
The FCA proposes adding new rules to the ISA Handbook to ensure that young people to fully understand what they are buying as they could end up out of pocket in the long run.
Michael Heath, Director of Milestone Financial Planning, explained: “At face value the Lifetime ISA seems an excellent proposition for young people, however there is great risk attached to them if people do not understand the financial penalties associated with an early withdrawal.”
Lifetime ISAs, were announced by former Chancellor George Osborne in the March 2016 Budget. They have been heralded as the solution to help the UK’s under 40s get on the property ladder and build a pension pot simultaneously.
Michael added: “The Lifetime ISA actually complicates the savings landscape for young people as they may have to choose between putting their spare money into a Workplace Pension or the Lifetime ISA. My feeling is the choice will be that a home is top of the wish-list for many young people; but where does that leave them at retirement age financially? Lifetime ISAs could be a ticking time-bomb if these additional regulations are not added to the Handbook.”
The FCA’s consultation closes on 25 January 2017. As part of the additions it wants to introduce to the Handbook, it proposes that firms will be required to give specific risk warnings at the point of sale which include reminding consumers of the importance of ensuring an appropriate mix of assets is held in the Lifetime ISA.
Firms will also have to remind consumers of the early withdrawal charge and any other charges. The FCA has also proposed that providers will have to offer a 30-day cancellation period after selling the Lifetime ISA.
You can read the FCAs consultation paper on Lifetime ISAs here.
The Lifetime ISA will be launched in April 2017 and offer investors the following:
-
A cash bonus worth up to £1,000 a year will be added to every £4,000 saved into a Lifetime ISA after it is launched in April 2017.
-
You need to be aged 18-40 to open one, and you can only touch the money to buy a home, or else face a stiff penalty on any withdrawals before you hit the age of 60.
-
You can keep your money in cash, or put it into stocks or investment funds, as with other ISAs.
-
Your savings and the bonus can be used towards a deposit on a first home worth up to £450,000 – and the deal allows two first-time buyers to both earn bonuses then pool their resources to buy a home.
-
All savers aged under 40 will be able to open a Lifetime ISA, even those who already own a home and are saving into a pension.
-
You can carry on earning bonuses until you are aged 50, and continue saving after that without bonuses. After 50, you can transfer your pot between providers or change your investment portfolio if you wish.
-
The overall annual ISA allowance is being hiked from £15,240 to £20,000 in April 2017, with the new Lifetime ISA pot falling under this umbrella.
-
You can only take out one Lifetime ISA a year, but you can take them out with different providers in other years. This will allow you to keep your savings under the £75,000 level, and qualify for a payout from the Financial Services Compensation Scheme if an ISA provider goes bust.
-
Those with a Help to Buy ISA can transfer those savings into a Lifetime ISA when they are launched in 2017, or continue saving into both. However, you can only use the bonus from one to buy a house. The Help to Buy ISA will be axed in November 2019.
-
First-time homebuyers will be able to use the Lifetime ISA bonus towards their deposit rather than having to wait for completion on a purchase. Help to Buy ISA holders are blocked from using their Government’s bonus for the first part of the purchase.
-
You can cash in a Lifetime ISA at any time before you turn 60, but you lose the bonus and any interest or growth on this, plus have to pay a charge which the Government initially said would be 5 per cent. It now intends to levy a straight 25 per cent penalty to cover all the above instead.
-
In addition to withdrawing your money from the Lifetime ISA to buy a home, you can also do so without penalty if you fall terminally ill.
If you’re unsure whether a Lifetime ISA is right for you, then contact Milestone Financial Planning and arrange a free, no obligation consultation with one of their team of experts. Get in touch with the Milestone Financial Planning team on 01246 268527 or visit www.milestonefp.co.uk
Top Rated Financial Advisors
