Regulator wants risk warnings for new Lifetime Isas
People taking out new Lifetime Isas will be given risk warnings under proposals from the City regulator.
Lifetime Isas will be available from April, allowing people aged up to 40 to put money away for their first home or their retirement, with a Government bonus.
The Financial Conduct Authority (FCA) has set out proposals, subject to consultation, for how it will regulate the promotion and distribution if Lifetime Isas, also known as Lisas.
When someone opens an account, they will be able to pay in up to £4,000 each tax year, up to the age of 50, and the Government will add a 25% bonus.
The money can be used towards a deposit on a first home worth up to £450,000, or after the age of 60 it can be taken out and used for retirement. Money can also be withdrawn if the customer has a terminal illness.
But investors face losing 25% of any money they withdraw before 60 for another purpose, in an early withdrawal charge.
The FCA said under the plans, 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 Lisa. Firms will also have to remind consumers of the early withdrawal charge and any other charges.
The regulator has also proposed that providers will have to offer a 30-day cancellation period after selling the Lisa.
It said the information investors need includes a warning that if someone opts out of a workplace pension in favour of saving into a Lisa, they may lose out on an employer contribution to their retirement saving.
Critics of Lisas have suggested they are complex and some investors could be left worse off. There have been particular concerns that some people might drop out of saving into a workplace pension - where they get "free money" through employer contributions into their pension pot - to save into a Lisa.
Earlier this week, former pensions minister Steve Webb, now director of policy at Royal London, said there should be a presumption against taking out a Lisa for those who are not taking full advantage of the matching workplace pension contributions on offer from their employer.
Mr Webb warned there was a real risk of a "mis-buying" scandal around Lisas.
Baroness Altmann, also a former pensions minister, has previously warned that Lisas will confuse workers who may opt out of much better workplace pensions.
She said providers should "wake up to the risks" of selling such deals.
Tom Selby, a senior analyst at AJ Bell, said: "Communication must be front and centre in the rollout of the Lifetime Isa, a fact the FCA has rightly acknowledged.
"The 25% exit penalty for early withdrawal is the major drawback of the product, so savers need to be fully aware of its existence and the potentially severe impact it could have on the value of their pot.
"It is important that people considering opting out of a workplace pension in favour of a Lifetime Isa are aware of what they could be missing out on - a contribution matched by your employer is effectively a guaranteed bonus of 100%."
