Up a bit, down a bit: Last minute changes to Lifetime Isas prove they’re a bad idea, says former pensions minister

A former pensions minister has hit out at the government's last-minute fiddling with Lifetime Isas, saying it is proof the initiative "has not been properly thought through".

Steve Webb lamented the news the Treasury will scrap exit fees on Lifetime Isas in the first year of their existence.

“This announcement is a further sign that the Lifetime Isa has not been properly thought through, said Webb, who worked with George Osborne on his raft of changes to the pensions in the UK. He continued:

The new product, which is a complex hybrid between a pension and an Isa, is due to be implemented in just a few months’ time, and yet the government is still making up the rules as it goes along.

What is a Lifetime Isa?

Announced in George Osborne's final budget as chancellor in March, Lifetime Isas are slated to be introduced in April 2017. Those aged between 18 and 40 can save into them and for every £4 saved, the government will top it up with an additional £1; to a limit of £4,000 per year

Savers can either put the money towards their first home or keep hold of it until they are 60, when they can withdraw it tax free.

But if they want to withdraw their money before then they'll have to pay back the government top-ups and incur a five per cent charge.

Because of the government top-ups, savers withdrawing early will in effect be paying a 6.25 per cent exit fee on their initial investment, plus repaying the government its money.

Not only is the government planning a moratorium on exit fees in the first year, but top-ups will be adjusted from being paid annually in the first year to monthly thereafter. According to Webb this "will add yet more confusion to an already complex product".

At the very least the government should hold off launching the Lifetime Isa until the process of automatic enrolment is complete and every employee has access to a good workplace pension.

Webb's calls for delaying the Lifetime Isa's launch were not shared by all. Rachel Vahey, product technical manager at Nucleus, welcomed the government's decision.

However, she felt the withdrawal charge was still far too high. “This is a simple tidying up of administration, not an easing of policy… in the future many people will be left in the position of facing a 6.25 per cent charge in their contributions if they decide – either through choice or necessity – to take their funds early."