LISA offers potential to get more under 40 years’ olds saving but it also increases emphasis on getting communications right
24 November 2016
Comment from Adrian Boulding, Head of Retirement Strategy at Dunstan Thomas
With just over four months to go until the launch of the Lifetime ISA, the FCA has just published draft changes to its rulebook to cover the selling of the new LISA in its Consultation Paper 16-32. In this 48-page hum-dinger, the FCA identifies 11 potential risks that purchasers of a LISA may be exposed to.
These risks fall into five key categories as follows: complexity, contributions, investments, access and tax. The regulator intends to amend its handbook so that LISA sellers and providers must disclose these risk warnings to customers when they offer the product.
The FCA believes that investors in LISAs should receive specific risk warnings in respect of:
1. Incurring the early withdrawal charge which may mean that they receive less from their LISA than they paid in, and
2. Potentially losing an employer contribution to a workplace pension for which they may be eligible, where they choose to open a LISA instead of opting into an Auto-Enrolment (AE) workplace scheme when it is offered to them
But will a sheet of risk warnings be any more help than the neatly folded leaflet, that comes with prescription medicines warning of potential side-effects? After all, most people don’t read these leaflets until they’ve felt some of those side-effects when it may be too late. Looking at the different risks that FCA has identified, we can see that we may need to deploy different customer engagement techniques to address different types of risks.
The early exit penalty can be addressed by using loss aversion as the driver. A clear statement that says if you invest £1,000 in a LISA in Year 1 and promptly change your mind, and seek to withdraw it all, you will lose £62.50, should frighten off anyone with cashflow difficulties that might need their money back quickly. We can use the natural human emotion that flows from fear of loss to discourage those who cannot commit to keeping their funds in a LISA – perhaps pushing them towards a more flexible alternative such as a cash ISA.
The FCA’s next big concern is that customers might choose LISAs over workplace pensions as their long-term savings vehicle of choice. Despite all the Treasury rhetoric that the LISA is not a competitor to pensions, it is squarely aimed at younger savers where AE take-up has been particularly strong.
Recent research by the Institute of Fiscal Studies found that AE has increased pensions membership of eligible 20-somethings from 27% to 85%. FCA worries that the lure of the LISA’s early Government-backed bonus might tempt younger employees to switch their regular savings from an AE pension to their LISA and consequently lose the all-important employer contribution associated with auto-enrolment pensions.
We can use the human emotion of greed to push people away from switching long-term saving away from AE and into a shiny new LISA. A simple message to say that there may be a better long-term savings vehicle for them than the LISA in the form of a pension where their pot will grow twice as fast as a LISA as their employer will be paying in too.
But the FCA’s worries over investment strategy are much harder to engage customers on. The regulator has rightly pointed out that the investments geared to supporting first home purchase in three or four years’ time, are likely to be very different from those suitable for saving for retirement over a 30 or 40-year period (and designed to deliver retirement income over a further 20 to 30 years). This means that the provider needs to keep up-to-date with the customer’s savings goals.
The customer’s investment strategy will need to change if he/she retains their LISA long after the window that the provider would reasonably expect a first-time house purchaser to have bought (and cashed up his LISA). At this point, perhaps by age 40, the LISA holder’s investment strategy will need to be reviewed and possibly altered with a view to supporting their retirement plans (which is the next exit point aged 60).
Customers buy savings products for all sorts of reasons: perhaps they liked the advertisement, their mate down the pub says he’s got one, they have a general sense that they should be saving something and they’ve just read that this new LISA is the latest Government initiative for savers.
We must help convert that generic enthusiasm for saving - to investing for the future with a view to reaching a well-defined goal. That means helping people to think ahead about what their real goals are and when they want to achieve them by. After all, we are not all like Michael Heseltine, who famously sketched out his life plan on the back of an envelope at Oxford and then achieved it all, apart from falling marginally short as deputy prime minister!
But simulating people to do their financial planning, often without the assistance of an adviser, will require some highly imaginative and engaging communications solutions to tempt them into those introspective thoughts that can help us move from forming notional aims to defining clear financial goals. The other thing to consider is that this engagement work cannot just be done at point of sale but through ongoing monitoring and regular updating of progress and goals over the 40-year plus duration of the LISA contract.
As always, this innovative offering designed to support young people in their quest to get on the housing ladder, has turned out to be rather more complex and challenging than it sounded when George Osborne announced it in his 2016 Budget. But that just makes our task of engaging and communicating with savers that much more important, and it’s not one we should shy away from as an industry.
Adrian Boulding is Director of Retirement Strategy at Dunstan Thomas