The Financial Conduct Authority has extended its risk warnings for the Lifetime ISA to highlight that savers could miss out on employer contributions if they switch their retirement savings to a LISA from a personal pension, following an industry consultation.

The Lifetime ISA is due to launch next month and will be open to savers under the age of 40 to save for a first house and/or retirement. It will allow savers to contribute £4,000 a year with the promise of a 25 per cent government bonus. However, the product has been criticised by the industry seeing it as signalling the end of pensions, which the Treasury has denied.

In its original proposals the FCA had only highlighted that savers could miss out on employer contributions in relation to workplace pensions. However, the FCA has said that it now acknowledges there are circumstances when a customer may be saving into a personal pension to which their employer contributes, and, therefore, could lose out on contributions if they preference a LISA.

In addition, because of the possibility that investors may not consider the impact of taking out a LISA on means-tested state benefits the FCA has also extended our suggested risk warning to address this point.

However, the FCA has kept its stance on financial advice: “We did not propose mandating that all LISA sales be advised or that firms should be required to specifically signpost financial advice when selling a LISA. This is because we consider that high quality information disclosure by firms – coupled with appropriate risk warnings – provide an appropriate and proportionate means of providing consumers with the ability to make good decisions about the suitability of the LISA for their own individual circumstances.”

Commenting on the policy statement AJ Bell senior analyst Tom Selby said: “The FCA is right to focus on the key consumer risks presented by the Lifetime ISA – namely people missing out on employer pension contributions, whether that be via a workplace or personal pension, and investing without being fully aware of the implications of the early withdrawal penalty. Adding information about the risk of losing out on means-tested payments also makes sense.

“Equally, we need to remember those who stand to benefit from the product. The LISA could be an attractive option for young people saving for a first home and basic rate taxpayers saving for retirement, for example. The approach to disclosure strikes the right balance between flexibility and personalisation, providing investors with a useful indicator of what they might get back without burdening them with pages of information they will never read.”

Barnett Waddingham senior consultant Malcolm McLean said: “It seems the message has finally got through to the FCA of the potential damage the Lifetime ISA could do to pension saving and the risks consumers face in missing out on employer contributions to a pension plan. There is also the real issue of the risk of loss of means-tested benefits that also needs to be highlighted up-front.

“It remains unseen whether these warnings on their own will suffice. The FCA is not making the taking of financial advice a mandatory requirement but I can’t help feeling that for many people advice, or at the very least guidance, will be necessary if they are to avoid making financial decisions which they may come to regret at a later stage.”

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