Fifty-six per cent of AJ Bell's Lifetime Isa (LISA) customers are using the product to save for retirement, however, fears that the LISA could increase auto-enrolment opt-outs appear misplaced, AJ Bell has found.
A survey of 400 LISA customers found that 78 per cent of people using the LISA to save for retirement are using it alongside their workplace pension. Thirty-two per cent of savers said they are using the product to save for a first house.
Just 3 per cent of those not saving in a workplace pension said they had opted-out to fund their LISA.
In terms of how the LISA works, more than nine in 10 customers were aware of the £4,000 annual contribution limit and the 25 per cent government bonus. However, the government exit penalty caused the most confusion, with one in five unable to explain how the charge works
Commenting, AJ Bell senior analyst said: "UK savers have clearly taken to the Lifetime ISA, with 166,000 accounts opened in the product’s first year. That is a promising number given the product is new and a relatively small number of providers currently offer it.
“Encouragingly, fears savers would opt-out of auto-enrolment in their droves in order to fund their LISA appear to have been misplaced. Around 4 in 5 LISA savers are contributing to a workplace pension and a LISA, while just a handful have chosen to quit their workplace scheme. Rather than sowing the seeds of auto-enrolment’s demise, the LISA is providing a valuable savings option alongside the flagship reforms."
“The fact so many people are making an active decision to save in a LISA over-and-above the auto-enrolment minimum is hugely encouraging and makes a mockery of calls made in some quarters to scrap the product altogether. The LISA is not perfect, however, and one problem area the government must now address is the exit penalty.
“It was clear from the start this risked creating confusion and this has been borne out in the research, with one in five respondents unable to explain how the 25 per cent early withdrawal charge works.
“With the LISA approaching its second birthday now is the time to revisit the mechanics of the product. Scrapping the exit penalty would be a sensible place to start. At the very least the exit penalty should be reduced to 20 per cent so that it equals the value the government bonus adds to contributions and covers investment growth achieved on the bonus.”