Ian Neale from Aries Insight says what the Lisa could mean for pensions.
Having concluded that while the current system does provide an incentive to save into a pension, it is also inflexible and poorly understood, especially by young people, and the chancellor announced the lifetime Isa.
It is almost inevitable that Lisas will be a contributory factor to the widely anticipated rise in auto-enrolment opt-out rates
In February 1999, following an earlier green paper on pension reform, the Treasury issued a joint consultation with the then Department for Social Security entitled 'Helping to deliver stakeholder pensions: flexibility in pension investment'.
This proposed a more flexible investment vehicle for managing pension contributions, a simple tax-efficient wrapper that the press actually labelled 'Lisa' – standing for lifelong individual savings accounts – though the Treasury was quick to deny it had that name in mind.
It also denied the 1999 'Lisa' clashed with the DSS's plans for stakeholder pensions, targeted at the millions not then in a pension scheme.
In another uncanny echo, the new Lisa has been criticised for damaging the potential success of auto-enrolment in pensions. In May 2016, the Pensions Policy Institute found it hard to decide if Lisa would be a pension complement or rival (Briefing Note 81), noting that a key determinant might be the requirement under auto-enrolment for employer pension contributions.
Let's briefly summarise the essential features of a Lisa:
Savers aged between 18 and 40 are eligible
Savings of up to £4,000 a year, paid in prior to age 50, are eligible to receive a 25 per cent bonus from the government
Money can be put towards the purchase of the saver's first home, or kept and withdrawn tax-free after age 60
Withdrawal prior to age 60 for any other purpose will lose the government bonus and attract a 5 per cent charge
The 25 per cent bonus for saving up to age 60 into a Lisa achieves no more than basic rate tax relief on pension contributions, without the additional pensions tax relief available to higher and additional-rate taxpayers.
On the other hand, the entire Lisa fund can be cashed out at 60 tax-free, whereas only 25 per cent of a money purchase pension pot can be taken tax-free (albeit from the earlier age of 55).
Under-40s will prioritise house purchase
A recent Hymans Robertson survey found those under 40 who have enough disposable income to save into a Lisa as well as a pension will probably do so.
For many in this Lisa target age bracket however, house purchase will be a more salient priority than the distant prospect of retirement – though the existing Help to Buy Isa creates additional complexity and potential confusion.
With the average first house deposit a formidable £30,000, this group are more likely to seek to maximise Lisa savings. Average annual earnings for under-40s being roughly the same, few are likely to pay more than minimum contributions into a pension as well.
It is almost inevitable that Lisas will be a contributory factor to the widely anticipated rise in auto-enrolment opt-out rates. It is to be hoped that the Lisa will be communicated as an additional savings channel, rather than an alternative to a pension.
While any stimulus to saving is welcome, the appeal of a Lisa is more immediate in that money is not necessarily locked up for as long as in a pension.
The relative simplicity of the basic Isa concept has made it a success story so far. The big risk is that where the individual has to compare and contrast the merits of pension saving and a Lisa, it turns out to be too complicated to decide.
Where next for the Lifetime Isa?
Video: In March 2016, the chancellor shocked the pensions industry with the introduction of the lifetime Isa, promising a 25 per cent top up for under-40s saving for a house or retirement. We spoke to the father of the Lisa, Michael Johnson from think-tank the Centre for Policy Studies, about what its introduction will mean and how it might change in future.
Paralysed, they either make no choice – but at least remain auto-enrolled in a pension scheme – or decide they cannot afford to save at all and opt out.
Lisa is a pensions issue in so far as it distracts attention from the paramount need to secure an income in later life. For that goal, and bearing in mind the employer contribution, a pension is – presently – more tax-efficient.
Ian Neale is director at policy specialist Aries Insight
