Written evidence submitted by SS&C

 

 

SS&C Financial Services Europe Limited (FCA number 161227) and SS&C Financial Services International Limited together provide outsourced administration services to a range of financial services companies.  Our clients include the managers of regulated collective investment schemes (such as Unit Trusts and OEICs), investment platforms, insurers, and wealth managers.  Many of these companies offer a combination of ISA products (including S&S ISA, JISA, LISA and CTF products) and pensions, administered using our technology.  We also work closely with Hubwise Securities Limited (FCA number 502619); an investment platform provider, ISA Manager, and SIPP Operator which is part of the SS&C Group.

The three companies named above are wholly-owned subsidiaries of SS&C Technologies, Inc. (NYSE: SSNC), a leading provider of specialised technology, strategic advisory, and business operations outsourcing to the financial and healthcare industries. We enable clients to transform complexity into strategic advantage by helping them continually stay ahead of and capitalise on ever-changing customer, business and regulatory requirements in the world's most demanding industries.

Given our position in the market, we are pleased to comment on the Treasury Committee’s Call for Evidence: “Is the Lifetime ISA fit for purpose in 2025?”.  We consider that the LISA remains a beneficial product for any Investor able to use it in the manner for which it was created (i.e. to support saving towards a first-time house purchase).  However, we also recognise that the structure of LISA represents a fine balance between various elements (such as the subscription level, the rate of bonus, and the rate of withdrawal charge), which can result in investors experiencing sub-optimal outcomes if they need to withdraw money from a LISA other than to make a qualifying house purchase.

Our overall conclusion is that the Government must first reaffirm its policy intention for the product – specifically the level of support it considers appropriate to offer to citizens, particularly noting the diversity of house prices across different regions.  Such clarification should inform whether any of the key parameters of the LISA product should be adjusted in order to mitigate any of the scenarios causing concern and debate.  We consider that the question about the Government achieving value for money through its operation of LISA is therefore particularly important, as such value for money should be measured against the successful achieving of that policy objective.

Q1              Is the Lifetime ISA fit for purpose in its current design, including as a combined product for house purchase and pension saving?

This is a multi-layered question, as in our view the Lifetime ISA is not a “pension savings” product.  We say this because we would consider a product as being specifically related to “pension savings” if it is a regulated pension scheme or a product that might be used for either accumulation or decumulation in respect of an investor’s savings within a pension scheme.

We recognise that the Lifetime ISA rules offer an ‘escape valve’ that savings / investment made within a LISA can be removed from the product without penalty once the investor reaches 60 years of age.  However, that feature is not directly related to the retirement of the individual or their personal tax position in respect of pensions (e.g. annual allowance, or the taxation of lump sums).

If the ability to access a savings / investment product at or after the age of 60 becomes an identifying characteristic of a “pension savings” product then most products on the market will fall into this category.

We recognise that some firms consider that the Government Bonus within a LISA might be viewed as a proxy for the tax credit available inside a pension – particularly in respect of any population that would not have rights to an auto-enrolment workplace pension.  However, there are two key reasons why we do not consider this is a valid argument:

 

We emphasise this point because there is a risk that seeking to categorise the LISA as a retirement product will impact the way that features of the LISA are viewed.

Returning to the question in the light of the above, we consider that the LISA is essentially “fit” as a savings / investment product designed to enable the Government to provide a measure of financial support and incentive to individuals who aspire to become first-time house-buyers.  There are of course some important questions that may indicate the product can be made “better” for the investor – but any such measures to some extent relate to the key balance between:

 

This second bullet of course reflects the key limits of the product:

 

We will consider such points within the individual questions that follow.

 

 

Q2              How well do consumers transition between using the Lifetime ISA as a product for house purchase, to then a product for pension saving?

As noted, the LISA was created in 2016 and could only be opened by individuals up to the age of 40 years.  Therefore at present even the earliest cohort of LISA investors will not yet have reached age 50 (the point at which contributions and bonus payments are no longer applicable).

A LISA Provider will know which of its LISA holders have successfully made a first-time house purchase, and could therefore consider whether any such investor has continued to use LISA for further investment after that primary purpose has been fulfilled (which would suggest a conscious decision by the investor to use LISA to benefit from the available Government Bonus rather than use a pension product and receive tax credits on an increased level of contributions over a sustained period).  However, the LISA Provider will generally not be aware of the personal circumstances of any LISA holder that has not yet made a first-time house purchase.  i.e the firm is not aware of what other savings the person has made, their sense of job security, their family and other commitments, or the geographical location in which the person might wish to buy a house.  It therefore feels unreliable to use the available data to presume that investors (many of whom may not be receiving financial advice) are behaving in a certain way at a certain time because they are “transitioning” their expected use of LISA.

For the reasons indicated above, we question the idea that any such ‘transition’ results in a product that can be “used” for pension saving.  While the existence of the Government Bonus might make the LISA seem more similar to a pension than if a normal ISA was compared with a pension – the limited subscriptions into LISA surely create a fundamental barrier to LISA being anything other than a supplementary savings / investment product that might provide additional financial liquidity once the person reaches 60 years old.

 

 

Q3              Given its policy purposes, is the Lifetime ISA value for money for the Government?

We do not believe we can offer a view on this.  It must be for the Government to consider whether the expense of supporting the scheme (including legislation, technology, the value of Government Bonuses being paid, and oversight of the scheme) are resulting in a sufficient positive impact in respect of first-time house purchases.

We recognise that the Government will not wish to be seen as driving house price inflation – particularly at the first-time buyer end of the market – and so must determine the appropriate balance between subscription levels and bonus levels.

 

 

Q4              Is the Lifetime ISA a suitable pension savings product?

In our view the LISA is not a pension savings product, and we do not consider this to be a fault of the product.  We consider that the primary use of LISA should be the intended purchase of a first-time buyer property, and that the ability to effect a withdrawal from the age of 60 without incurring a withdrawal charge is simply an ‘escape valve’ without which investors might be more wary of using LISA given that their home-buying aspirations might change.

We note that the LISA offers the additional benefit in such cases that, unlike a pension, the withdrawals made are not subject to income tax.

 

 

Q5              Should the Lifetime ISA be abolished?

We see no need to abolish the LISA, though we recognise that the viability of the product will be based on Government’s view of whether the product is successfully achieving the aims for which it was created.

Product Providers can offer investors a range of other products that are more efficient to administer and offer more flexible savings / investments for the investor.  Therefore, if Government was to conclude that the LISA is not enabling the policy objective to be achieved, there are other product types already available for use by investors (but which would not feature a Government Bonus targeted on a prospective first-time house purchase).

As such, we conclude that abolition of the LISA product might be justified unless the Government is convinced that:

1)      the LISA is successfully engaging the population that the Government most wants to help in respect of house purchases;

2)      the provision of the bonus is central to achieving Government’s policy objective; and

3)      providing the LISA product remains within Government’s parameters for expenditure (including the cost to Government of paying the bonus amounts and overseeing / administering the product).

 

 

Q6              Should the Lifetime ISA be reformed to remove the withdrawal penalty?

We consider that the existence of the Government Bonus is a fundamental benefit of the LISA, and is the only feature that makes it superior to various other available product types (such as normal ISAs).  As such it is reasonable for the Government to wish the benefit of that bonus to only be received by those using the product for the intended purpose.

We do not therefore consider that the withdrawal penalty should be removed.  To do so simply enables those of the relevant age to save for a period and gain a 25% uplift on their money, without any stated aim of the product being met.

By giving the bonus shortly after the time of Contribution, the LISA benefits from investment growth on that bonus payment – and this creates the debate over how a withdrawal penalty might operate.  It seems to us that the need is to establish an equitable sharing of the investment growth made on the contribution.  We offer the following as observations about this complex issues, and not because we consider that any particular approach to the Withdrawal Charge would resolve all debate on the matter.

Consider the following illustrative investment behaviour, in which an Investor makes full LISA subscriptions for ten years, and their account remains open for a further five years:

(Annual investment performance has been made variable, in the range of 2% to 5% p.a. for illustrative purposes.)

We can therefore consider the relative gain to both the Investor and Government if the account was closed at the end of each year, based on the existing 25% Withdrawal Charge:

The result is that a 25% withdrawal charge provides a greater investment return for the Government than is achieved by the investor.  Effectively, a significant portion of the growth arising on the investor’s portion becomes growth for the government.

By contrast, if the Withdrawal Charge is reduced to 20% for the same illustration, we see that the Investor and Government each receive the same effective annual return when a LISA is closed and the withdrawal fee incurred:

Therefore, in cases of full account closure to which the Withdrawal Charge applies, a charge rate of 20% appears to provide a fairer allocation of investment growth between the investor and the Government.  Yet the Government has incurred expense in establishing the LISA scheme.

Other scenarios raise different complexities – and the perception of outcomes seems impacted if there is any attempt to mentally apportion any of the remaining balance as being either “the investor’s money” or “Government’s money” (which is not really the case when the value is within the LISA and it remains unknown whether a Withdrawal Charge would be incurred in the future).

Suppose an example where an investor makes a single £4,000 contribution in year 1 (to which the Government adds a £1,000 bonus) and leaves the LISA unchanged until the end of year 5.

If at the end of year 5 the investor makes a gross withdrawal of £4,000 to which the Withdrawal Charge is applicable, then £1,000 is payable to the Government as a withdrawal charge.  This might be viewed as ‘returning the Government bonus’, though the Government has not received any growth on that money.  While the Investor at that time only receives £3,000 (having initially contributed £4,000), so as long as the Investor leaves the remaining balance in the LISA until age 60, the Investor effectively receives the benefit of their use of the Government’s money during those initial 5 years.  The value of this investor benefit is determined by the period of time until the withdrawal takes place and the performance of the investments bought.

Effectively we consider that the most meaningful comparison is made between the outcomes achieved by the same Investor contribution being made inside a LISA or outside – given the effect of the Bonus (a certain event) and Withdrawal Charge (a potential event).  An eligible investor with £4,000 to invest in a given year could experience three potential outcomes in the context of this Call for Evidence, depending on which scenario applies:

 

The following illustrates the outcomes generated depending on the year in which closure occurs (assuming that the expenses applied to each product are the same and that the same investment performance is achieved in each scenario).  We also include the potential outcome if the Withdrawal Charge were reduced to 20%:

The above demonstrates the principles applicable to any subscription into a LISA:

 

Over time the investor is likely to consider other subscriptions and potential withdrawals, but for any such potential action the above principles remain applicable.  i.e. an investor considering a subscription must make an informed decision based on their expectations:

 

Viewed in this way, it would seem that a LISA is a good product for an investor who will have sufficient liquid savings / investments that they will not need to withdraw from the LISA during any period at which the Withdrawal Charge would apply.

It might therefore be argued that the LISA is comparably therefore a more suitable product for a more affluent individual (who has other financial reserves), and that reducing the Withdrawal Charge to another figure greater than 20% would affect the financial balance of this point without making it fully redundant.

In our view this question relates to balance.  It therefore requires Government to consider its policy objective for LISA:  which members of society does Government most wish to support through the LISA – and what balance does Government therefore consider necessary between:

 

We conclude that the Government’s view of the policy objective it wishes to achieve via LISA is therefore linked to the ‘value for money’ question posed earlier in the Call for Evidence.

 

 

Q7              Should the Lifetime ISA be restricted to those with no access to a workplace pension?

We see no grounds for such a position.  The LISA is not a pension and was not designed for such a purpose.  LISA offers only a limited bonus (on a capped subscription amount) and does not allow any subscription to be made from the age of 50 years.

While recognising that value accrued within a LISA might be held until retirement, being accessible from age 60 without a withdrawal charge being incurred (and without income tax being applied), and can therefore form a part of an Investor’s provision for their retirement, we do not consider that LISA can be viewed as being intended to be equivalent to a workplace pension, and it should not be limited to those with no access to a workplace pension.

We would further add that implementing such a policy decision would increase the complexity of the product for LISA Managers: how would the Firm be able to satisfy itself whether a given Applicant was therefore able to subscribe in LISA?  How would HMRC be able to validate this point?  Unless HMRC was in a position to immediately deny any application as part of the API exchanges undertaken, it is likely that error cases would arise and that LISA Managers would become involved in an increased volume of void cases (making the LISA product more expensive to operate).

 

 

Q8              Should the Lifetime ISA house price cap be raised in line with inflation, or removed?

We appreciate that this is a delicate matter for Government, given the diverse properties that might be bought within the value of the price cap in different regions of the UK.  While increasing the price cap might have benefits to those buying property in expensive areas, doing so in less expensive regions might risk the view that Government is enabling house price inflation.

We consider that the limited value of subscriptions possible into a LISA can shield the Government from such accusations; a person opening a LISA at age 18 and subscribing the maximum amount until age 50 would receive a total government bonus of £32,000 on total subscriptions of £128,000 (on which investment growth would be expected, though it must be expected that a first-time house purchase would be made at a younger age and so with a lower level of subscriptions having been made).  However, at the current cap figure, the LISA has potential to account for approx. 30% of the purchase price of the property – having a significant benefit in reducing ongoing mortgage payments.  Increasing the cap would reduce the proportion of purchase price that a LISA might achieve and so result in increased mortgage payments over time (cetris paribus).

We do think that the potential for a ‘cliff-edge’ in more expensive parts of the country (by which a greater proportion of first-time house purchases might exceed the cap and so expose the Investor to a prejudicial Withdrawal Charge) presents a concern.  While we are wary of the administration of LISA being made more complex, it would seem wise to explore some mechanism by which a reduced level of Withdrawal Charge might be applied in cases of first-time house purchase where the purchase price exceeded the cap (possibly itself within some range).  Such an approach might enable the Government to strike an effective balance between the need to have a cap to satisfy the policy objective for the many, while avoiding a punitive level of Withdrawal Charge on those who happen to be buying a first-time property in a more expensive part of the country.

 

 

Q9              Should the annual Lifetime ISA limit be raised from £4,000

It is true that an increase in the LISA limit would enable greater account values and so make the product more efficient for Managers to offer.

However, we recognise the significant balance between the subscription level, the bonus rate made available, and the ability of the Government to defend itself against claims that the LISA scheme might be fuelling house price inflation.

We believe this must therefore remain a factor to be considered by Government in respect of its policy objective.

 

 

Q10              Should the Lifetime ISA be reformed in any other way?

Overall we consider that the LISA is and remains a generous preferential product for those who are able to use it in the manner intended (i.e. to support savings for a first-time house purchase).  We recognise that a change in personal circumstances of the investor can lead to a lack of liquidity of the product or to the imposition of a punitive withdrawal charge – though we consider that this fact is something that should be explained to Investors considering the product.

We further recognise that key elements of LISA design are inter-related (e.g. rate of the bonus, rate of withdrawal charge, the house price cap) and that it is correct for Government to consider whether the current balance of such items continues to be a good fit for the policy intention of continuing the LISA product.

However, if a product such as LISA is to remain part of the landscape, the potential reform we would suggest for consideration is to make the LISA separate from the ISA rules.  This is because the LISA includes key features that are fundamentally different to the behaviours of a normal ISA product.  For example:

 

As noted within our response to the Call for Evidence, we recognise that the LISA needs to include such features.  However, the overall explanation of such features to investors would be simplified if the LISA was not a type of ISA.  Such a separation would in our view retain clarity and simplicity of ‘the ISA brand’ for investors.  If the LISA was set aside, the key messages about adult ISA products would be as follows:

 

As the LISA is currently a form of ISA, any explanation of the above key messages becomes more complicated to accurately communicate – because the ISA Manager needs to recognise the potential for the investor to hold a LISA.  As a result, ISA Managers seeking to explain their ISA products to an investor need to recognise various additional scenarios and considerations – even though the particular investor might not have a LISA.

Therefore, if the Government was to conclude that a product such as LISA is successfully enabling its policy objective to be satisfied, and that such a product should therefore continue to be part of the UK’s saving and investment landscape, consideration should be given to establishing that product outside of ISA Regulations; making it a free-standing product with its own annual contribution limit and no linkage to the ISA £20k annual subscription limit and ISA Transfer rules.

 

February 2025