Written by Adam Jones, Guest Blogger on Wednesday 13 April 2016
Until it was side-lined somewhat by the news of a certain resignation, the introduction of a Lifetime ISA was the biggest news from this year’s budget. The LISA is pencilled for launch in April 2017 and you can read a nice summary of the product on the Her Majesty’s Treasury (HMT) website if you are still among the uninitiated. In short, it offers a nifty solution for the two key financial challenges facing my generation, buying your first home in our massively over inflated housing market and saving for retirement.
Some have called the LISA a stealth move to do away with pensions. I’d call it a clear statement of intent from the Chancellor.
It provides a TEE vehicle for retirement saving for everyone under 40. If the chancellor raises the £4k limit on bonus payments and allows workplace contributions to the product under auto-enrolment, I don’t see a need for pensions for the majority of the population (especially as higher rate tax relief’s days are numbered). I think it’s fair to say that the death knell has been sounded for pensions in the longer term.
In the wake of the budget, many firms will now be kicking off the process of looking at how they can make their existing ISA product act like a Lifetime ISA. What becomes increasingly clear as you dig into the detail is that this is far from straightforward from a technology and operations point of view.
HMT’s detailed fact sheet states that Lifetime ISA is designed to work with the grain of existing ISA products. I’d challenge this. While some aspects of the LISA are ISA through and through, it requires a range of functionality which is typically more aligned with pensions processing.
- You need to be able to add an extra amount from a 3rd party to individual contributions.
- You need a mechanism to claim the extra amount from the HMRC.
- You need to restrict withdrawals for individuals beneath a certain age.
- You need to enforce a complex exit penalty on those who still wish to withdraw.
- You need to offer serious ill health processing.
- You need to allow a one off tax free withdrawal at some point prior to retirement (with which you will buy your first house).
In addition to these pension-esque capabilities there are some more oddities in the product fact sheet, not least of which is the concept of having to figure out the growth on the government bonus as part of the exit structure. One can’t help but think the same set up would be frowned upon as part of a structured product so let’s hope someone sees the light before letting that particular complexity hit the market.
The challenge for firms looking to bring a Lifetime ISA to market will be that product functionality is typically well and truly baked into back office systems offering little flexibility (especially in proprietary builds or older systems). Compounding this problem are many legacy processes which are reliant on paper and don’t scale under pressure. To make a change, you need support from IT and for most platform providers, development roadmaps are already stacked out. Something is going to have to give in order to bring propositions to market by April 2017.
What seemed like a simple idea on first inspection is likely to have people scratching their head for a while as to exactly how to deliver it. Some firms may be better looking away from supercharging their ISA system, and instead to simplifying their pension solution. Either way, while the Chancellor has set his stall out on what he wants to achieve with the product, I’m not sure the industry is clear on how they are going to deliver it.