7th September 2016
The proposed exit charge on the new Lifetime ISA is overly punitive and should be amended before the product launches in April 2017, according to investment platform AJ Bell.
Draft legislation published yesterday confirmed that penalty free withdrawals can only be made to buy a first home worth up to £450,000, if the saver becomes terminally ill or after the investor reaches age 60.
The paper also suggested that the exit penalty will be applied as a 25% Government charge applied to the amount of withdrawal. The explanatory notes spell out that this returns the government bonus element including any interest or growth on that bonus with a ‘small additional charge applied’.
However, this structure means that the Government is contributing 20% of the initial investment but then charging an exit fee of 25% on the entire fund including all investment growth.
So, if someone contributes the maximum £4,000 over 10 years they would have invested £40,000 and this would have been topped up with £10,000 of Government contributions to give a total investment of £50,000.
If this grows at 4% per annum after charges (the total return of the FTSE All Share index over the past 10 years was 5.8%) the fund would be worth £62,432.
The 25% exit charge on £62,432 would be £15,608. This returns the Government contributions of £10,000 plus £5,608 which equates to 45% of all investment growth generated over the period.
It would leave the investor with £34,392 (see table 1 below).
Tom Selby, senior analyst at AJ Bell, said: “It is good news that the draft legislation indicates the lifetime ISA has been kept simple, with no mention of allowing borrowing or additional withdrawal options. However, it is disappointing to see the Government pushing ahead with an exit fee that looks overly punitive if people unexpectedly need access to their savings.
“It is understandable that the Government would look to recoup its own contribution if a customer decides to withdraw their money early but the 25% level it has set looks too high when you consider the impact it would have on someone’s savings. Although the Government bonus has been positioned as 25%, it only equates to 20% of the investment being made. A 25% exit charge on the whole fund, including investment growth, therefore has a disproportionate impact on the end value an investor would be left with.
“We’d like the Government to reconsider the level of the early exit penalty before the product is launched in April 2017 and ensure it is set at a level that enables the Government bonus to be recouped, plus investment growth on that bonus, but does not eat into the investment growth achieved on the individual investor’s personal contribution. If it doesn’t, investors will have to be very sure that they will not need access to their savings for reasons other than a house purchase before locking funds into a Lifetime ISA.”
|Contributions (maximum each year for 10 years)||Investment growth over 10 years*||Fund value after 10 years||Exit penalty (25% of fund value)||End value to customer|
*4% per annum after charges (the total return of the FTSE All Share index over the past 10 years was 5.8%).