Lifetime ISA providers will be required to give customers specific risk warnings, says FCA

The regulator has also proposed that customers be given a 30-day cancellation period when purchasing a LISA, more than double the 14-day cancellation period which applies to sales of standard ISAs. It is consulting until 25 January 2017 on draft rules governing the promotion and sale of the new savings product, which is due to be introduced in April 2017.

Pensions and lifetime savings expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said that the product had "moved another step closer to reality" with the publication of the proposed rules around how LISAs would work from a regulatory point of view.

"However, LISAs remain controversial and the consultation flags up a number of issues that give rise to the controversy," he said. "For example, investors may lose out on employer contributions to a pension and underestimate the benefits of other forms of retirement saving; and the features and restrictions of a LISA are more complex than an existing cash ISA or stocks and shares ISA."

"LISAs also raise some of the very biggest questions facing the policymakers right now, such as whether this marks the start of a move away from an EET taxation system for pensions and whether we should accept, out of necessity or otherwise, that property wealth is now intrinsically linked to pension saving. The answer may be solved by consumer demand one way or the other - or changes in the cost of home ownership," he said.

The LISA was created following a government 'green paper' which considered possible changes to the pension tax regime, including a move from the current 'exempt-exempt-taxed' (EET) model of pension saving to an ISA-style 'tax-exempt-exempt' (TEE) system. Saving into a pension is tax free as are, for the most part, any investment returns over the lifetime of the pension saving arrangement. Instead, the actual pension income is taxed. With an ISA, savings are made from taxable income but then returns and withdrawals are tax exempt.

LISAs will be available to those aged between 18 and 40, who will be able to save up to £4,000 each year into the product for use towards the purchase of their first home or for their retirement. Money paid into the account before the saver turns 50 will be topped up with a 25% bonus from the government. Withdrawals made other than for one of the two stated purposes will forfeit the government bonus and be subject to a small additional charge to discourage the use of the product for purposes other than long-term saving.

The FCA intends to regulate LISAs in much the same way as other ISA products, but to include "some additional protections designed to reflect the dual purpose of a LISA and the restrictions on accessing funds", according to the consultation paper.

"The LISA combines elements of a short-to-medium-term deposit based savings product with a long-term retail investment product," it said. "We believe this combination - together with the early withdrawal charge - presents a number of risks to our objectives, particularly our consumer protection objective."

These risks include customers not sufficiently understanding the difference between a pension and a LISA; losing out on employer workplace pension contributions; and failing to invest in an appropriate mix of assets, the FCA said.

To address this, firms should give customers a "clear explanation" of the early withdrawal charge, including "a warning that an investor incurring the early withdrawal charge may get back less than they put in". Customers should also be told that they will lose employer pension contributions to which they are entitled if they opt out of a workplace pension in favour of a LISA, and be provided with an indication of what they might get back from a LISA at age 60 in the form of a table, the FCA said.