DIY investor: Dilemma of a lifetime

In early April, the ever-expanding Isa family will spawn another member—Lisa, the Lifetime Isa. Anyone aged between 18 and 40 will be able to open a Lisa and benefit from a government promise that for every £1 they put in, up to a ceiling of £4,000 per tax year, the state will add a 25 per cent top up, worth up to £1,000. Provided the resulting fund is used to buy a first home (for no more than £450,000) or is saved for retirement, the 25 per cent bonus is safe. If the holder takes the money out for any other reason, the government top-up is forfeited.

Even allowing for those fiddly conditions, it’s a decent deal—though sadly one for which I am too old to qualify. However, as well as its obvious attractions a number of problems strike me about this new breed of Isa.

The first is that it is another example of a Treasury savings initiative that partially replicates existing tax incentives. The same is true of the Innovative Finance Isa, designed to exempt income from sources such as peer-to-peer loans from tax—it’s a grand idea but the first £1,000 of interest income for a basic-rate taxpayer is already tax-free under the savings allowance (you need an awful lot of money in the bank to earn more than that these days). Still, I guess you can’t have too many incentives to save and for higher-rate taxpayers, who receive only their first £500 of interest income tax-free, the attractions are more obvious.

In the case of the Lisa, the rather more worrying overlap is with workplace pensions: there are at least superficial similarities between the two in terms of tax breaks. Critics worry that young people with limited capacity to save might be tempted to opt out of workplace pensions, which offer tax relief as well as contributions from their employer, and instead put their money into a Lisa, which gives them more flexibility over how they spend it. If that happens, they will effectively be giving up a pay rise that they have a legal right to receive.

The signs are that some financial services groups are nervous about offering Lisas because they fear they could be hit with yet another misselling scandal further down the road, when people realise what they’ve missed out on. We shall see.

However, for one group, none of this need be too much of a worry: the better off, who usually benefit the most from tax incentives designed to encourage saving. People who pay into pensions for their children (as we do) already receive 20 per cent tax relief on up to £2,880 of contributions per child every tax year, effectively turning monthly contributions of £240 into £300. Now we have another way to claim a 25 per cent state subsidy for passing our wealth on to the next generation: get them to open a Lisa when they reach 18 and start paying into that too.

So for the comfortably off there’s no problem: there is no issue with misselling if the buyer can afford both a Lisa and a workplace pension. For everyone else, this new arrival creates a tricky dilemma.