Former pensions minister Steve Webb has harshly criticised the government for a late change to the Lifetime ISA legislation, which will result in an increase in the exit penalty.
Lifetime ISAs will allow under-40s to save for a home and retirement simultaneously from April this year.
This new account is likely to be immensely popular due to the difficulty of getting on the housing ladder, with a recent survey finding that nearly two thirds of savers under 40 want to sign up.
However, those wishing to withdraw their money early from the ISA could face an exit charge of up to 25 per cent, which will be charged if the money is taken out for any reason except buying a property or falling terminally ill before they reach the age of 60.
Under the new rule change the 25 per cent exit fee will not be levied on early withdrawals from April 2017 as originally planned, but only from April 2018 onwards.
The government recently announced that it would also only contribute its 20 per cent bonus on people’s savings at the end of the first year following the launch, and then switch to making monthly bonus payments into pots at the start of the second year in April 2018.
Jane Ellison, Financial Secretary to the Treasury, recently spoke in Parliament about the changes. She said: “If people want to withdraw from their Lifetime ISA in 2017/18, they must close their account, and there will be no government charge to do so. No bonuses will be paid on such closed accounts.
“An individual who has closed their account will be able to open another Lifetime ISA in 2017/18 and contribute up to £4,000 into it, if they wish to. From April 2018 the government bonus will be paid monthly.”
However, Steve Webb, who was Pensions Minister between 2010 and 2015, said: “This announcement is a further sign that the Lifetime ISA has not been properly thought through.
“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.
“To have one set of rules on withdrawals for 2017/18 and another for the year after, and to move from annual government top-ups in 2017/18 to monthly ones in 2018/19, will add yet more confusion to an already complex product.
“It is not too late for the government to admit that the Lifetime ISA risks undermining the real progress that has been made on getting young people saving through a workplace pension under automatic-enrolment, and to reconsider the whole project.
“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.”
Ros Altmann, his successor as Pensions Minister until last summer, added: “I am calling on the Chancellor to realise the dangers of trying to encourage people to use a so-called “Lifetime ISA” as a retirement savings product. This product is masquerading as a pension, [and] will confuse workers who may opt out of much better workplace pensions. This is an obvious mis-selling scandal waiting to happen.”