The lukewarm welcome many potential providers have offered the LISA is at odds with the more positive reaction of almost all the millennials surveyed recently by Dunstan Thomas, says Adrian Boulding
The Lifetime ISA launches on 6 April 2017 and recent research by Dunstan Thomas among 23 to 36-year-old millennials suggests the government could have a major success on its hands.
A starting point is the ONS population statistics, which show there are 18 million adults in the UK aged between 18 and 40 - the required age range for opening a new LISA account. Only perhaps the target audience is twice this size as, for each millennial who could open a LISA, there could be a ‘Bank of Mum and Dad' that might want to help them onto the property and savings ladder with a cash donation.
In many ways LISA is the Help to Buy ISA with knobs on. Both are aimed at young adults saving for a deposit to buy their first home. But whereas the Help to Buy ISA is a once and done affair, the LISA has legs.
With Help to Buy, when you make the house purchase the account closes. It is all finished. But with LISA things are different. You do not have to close your LISA to get the bonus. You do not have to spend all the LISA funds on the house purchase, although of course many will. No, you can carry on making payments into the LISA after buying your first house, and those further payments will attract further bonuses.
So, we should expect LISA to be at least as successful as the Help to Buy ISA has been - and that product sold 500,000 plans in its first nine months, with many applicants putting in the maximum contribution allowable. Already 27,000 homes have been purchased using a Help to Buy ISA, with 70% of those involving people aged between 25 and 34. Particularly popular areas for those first-home purchases have proved to be the North West of England, Yorkshire and the Humber, where people know a bargain when they see one.
The rather dry-sounding Savings (Government Contributions) Bill 2016 passed uneventfully through Parliament last year. But key reading for anyone contemplating the LISA market was the Impact Assessment the government bean-counters had stapled on the back.
This tells us the Chancellor has set aside funds to meet the bonus payments for 200,000 customers in the first year alone. And following earlier experience, he is expecting an average contribution of £3,500 - very close to the maximum allowable £4,000. That will be almost £1bn pounds of LISA assets under management once the 25% bonus is added at the end of the first year.
The Impact Assessment projects onwards and the government is expecting there to be 800,000 LISA accounts receiving regular contributions by tax year 2020/21. But, rather like the building of the M25 motorway, I think they may have seriously underestimated traffic volumes.
Dunstan Thomas has just completed a two-pronged research exercise into the savings habits of millennials. First, we commission respected market researcher Opinium to conduct an online survey of 1,000 millennials, with the results coming straight from their smartphones into our database.
We followed that up by asking Agility PR to take the cameras out onto the streets of London, Liverpool and Bristol and ask millennials to tell it to us in their own way, straight to camera. The results were surprising and challenge two established views I often hear as accepted truths in conversations around the savings industry.
First, do not believe people who tell you today's youngsters don't save, or don't save enough. We found 62% of millennials are making regular savings. And the amounts are sizeable too. The average contribution is £161 per month and the median figure £100 per month.
Second, millennials do not share the commonly-held view that the Bank of Mum and Dad will provide everything for them. We talked to millennials preparing for their first property purchase and they will be providing the lion's share of the deposit themselves.
In fact, 48% of the deposit will come from their own savings - a figure that rises to 64% when you add in their partner's savings. Meanwhile Bank of Mum and Dad will be providing just 14%. Actually, I should have said ‘Mums and Dads' as that 14% is the expected contribution from both sets of parents added together.
What came across from both strands of the research was millennials' hunger for information and for tools that would help them to understand what they need to save and how they are progressing against their targets.
They were genuinely keen to tell the interviewer about which apps they used and what they did for them, even to the extent of whipping the smartphone out of their pockets to offer an impromptu demonstration.
A particular favourite was apps for micro-saving, which allow small amounts to be saved - perhaps by rounding up purchases or sweeping up loose change at the end of the day. They wanted the app to show how the small amounts are built up and then invested, in line with their risk appetite, into something meaningful at the end of the week.
Millennials seem very clear technology is their servant. It must do things for them, in a way that is at once simple and timely - thereby creating a sense it was worth their while signing into that app regularly. I detected such a feeling of loyalty to some apps that it reminded me of the very personal loyalty customers used to show to their door to door insurance salesman in the 1980s. Both distributors and product providers would do well to note this - the old brand loyalty is being replaced by a new concept that I'm going to call ‘app-loyalty'.
Returning our focus to the LISA, our online survey told us 71% of millennials have heard of the Lifetime ISA and 32% intend to take one out. That seems to confirm the government has a success on its hands, as the obvious benchmark here is ordinary ISAs where just 20% of this age group currently have one.
Still, they are keen to understand the small print. A number of interviewees felt the 25% bonus was too good to be true, and declared they would be checking all the terms and conditions before they put any of their money in. Perhaps they have been listening to the FCA's ‘ScamSmart' adverts! Such natural caution is to be welcomed, and I am sure they will find LISA providers are absent from the FCA warning list of firms to avoid.
Our biggest remaining concern, however, is the exit charge on any withdrawals that are not for the approved lifetime events of first-house purchase, suffering a terminal illness or achieving age 60. Some customers may think a government bonus of 25% followed by an exit charge of 25% cancel each other out. They do not, of course,, and the net effect is a 6.25% exit tax payable to government, in addition to any exit charges from their provider.
Perhaps they will heed the risk warning the FCA insists must be included in the sales material. Or they may be caught out if they start saving for one thing but then change their mind and want to spend funds on something else.
We asked millennials for their top savings goals, and the answers that came back - while not surprising - were a complete mix of things that do and do not count as lifetime events that allow funds to be withdrawn in full, including the government bonus. For the record, millennials' top five savings goals were ‘rainy day' money (38%), holiday (29%), deposit for first property (26%), retirement (19%) and white goods and furniture (16%).
The odd thing is that the pretty much universally warm welcome LISA received from the millennials we spoke to was at odds with the reactions we see from potential providers, distributors, and wealth managers.
Among the industry, we seem to have a ‘marmite' attitude to LISA, with some shunning it as a political stunt that they will have nothing to do with and others declaring they will launch one on 6 April, or as soon after as systems and compliance allow them out of the starting gate.
Adrian Boulding is director of retirement strategy at Dunstan Thomas
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