The Financial Conduct Authority (FCA) has extended its risk warnings on the Lifetime ISA, due to be launched to consumers at the start of the new tax year, following a consultation with the industry.
In a paper out on 7 February the regulator said risk warnings on losses of employer pension contributions would be widened out to personal pensions.
Previously such warnings were earmarked for workplace pensions but under the new rules, firms will need to warn investors of the losses they might incur from switching away from a personal pension scheme, where an employer is matching their contributions, to a LISA.
The warnings will also need to include an explanation of how a switch to LISA could impact means-tested state benefits.
However, the regulator stopped short of mandating the signposting to financial advice for people wanting to open a LISA.
"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," the FCA said.
The regulator said it would give firms some flexibility on how to present the guidance information. It will allow them to provide their own illustrations or additional versions of the customer outcomes table provided by the FCA, so long as the new illustrations are not given more prominence than the table, and meet the 'fair, clear and not misleading' rule.
LISA is due to become available to consumers from 6 April. It will allow savers aged between 18 and 40 to save £4,000 a year tax-free with the promise of a 25% bonus from the taxman if the cash is withdrawn for retirement income or to buy a home. Early access is permitted before age 60 but only to fund a house purchase. There is also a 25% withdrawal charge for early exits.
The product had previously drawn criticism from the industry amid concerns that the introduction of the LISA would phase out future Government funding of the UK pensions system.
'FCA should have gone further'
Aegon pensions director Steven Cameron supported the move by the FCA, although he felt the regulator should have gone further. He said: "We support providing LISA investors with extensive risk warnings.
"However, with the potential for a LISA to be held for 40 years, we believe the FCA should have gone further in specifying ongoing information and risk warnings, for example to prompt a review of investment strategy if objectives change from house purchase to retirement funding."
Similarly, Nucleus product technical manager Rachel Vahey said: "We would have liked to see a change to how the withdrawal charge is described. A 25% government bonus on the way in and a 25% withdrawal charge on the way out will sound equitable to many people.
"Instead, it would be better to describe the withdrawal charge as reclaiming government bonus plus an additional charge on the member's own contributions."
AJ Bell senior analyst Tom Selby added: "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."
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