5Safeguarding pension saving
The Lifetime ISA
43.The Lifetime ISA (LISA) was announced in the March 2016 Budget speech. This new savings product is scheduled to be available to people aged under 40.80 The key features of the LISA are:
- savers can put in up to a £4,000 per year;
- until the saver reaches their 50th birthday, annual LISA savings will be supplemented by a 25% Government bonus;
- savings, including the bonus, can be withdrawn at any time to purchase a first home;
- savings can be withdrawn tax-free from the saver’s 60th birthday; and
- savings withdrawn at any other stage will incur a 5% charge and the Government bonus (and any growth or interest on it) will be lost.
44.The Treasury said the purpose of the LISA is to “help young people save flexibly for the long term and ensure they do not have to choose between saving for retirement and saving for their first home”.81 They intend to bring forward legislation in autumn 2016 to introduce the LISA from April 2017.82 We heard concerns that the LISA could compete with workplace pensions, undermining AE and pension saving.83 We took additional oral and written evidence on this issue.
Complement or competitor?
45.We heard conflicting views from Government on what the LISA is for. The DWP told us that the LISA is “not a part of the pension system but an additional flexible savings product that can complement pension savings”. 84 Similarly, the Minister said:
A pension is a pension and an ISA, whatever you call it, is not a pension … It does concern me if people are trying to suggest that this Lifetime ISA is somehow a pension; in my view it is not.85
46.In his Budget speech, however, the Chancellor stated the LISA was
for those under 40, many of whom haven’t had such a good deal from the pension system.86
As shown in Figure 3, the Treasury’s LISA factsheet depicts savings going towards either a house or a piggy bank labelled “pension”.87 People could certainly be forgiven for concluding that the LISA was, in part, a pension product.
Figure 2: Treasury presentation of LISA
47.The DWP told us that “saving through automatic enrolment or a Lifetime ISA is not an either/or decision for individuals”.88 However, Michael Johnson, Research Fellow at the Centre for Policy Studies and architect of the LISA, acknowledged that many employees not already saving or in a pension scheme would have to make a decision about whether they saved their money in a pension or a LISA—they would not be able to afford both.89 He added:
given the choice, many people would prefer to contribute to an ISA rather than a personal pension. For many, ready access to post-tax contributions is valued above tax relief.90
48.Many witnesses concurred that some people would opt out of AE in order to save in a LISA. For example, Royal London, a pensions provider, said:
The introduction of LISA requires young savers who would have been auto enrolled into their workplace scheme to make very difficult decisions. Inevitably if they have insufficient resources to save in both tax-advantaged vehicles then many more people will opt out of their workplace pension.91
49.Zurich, an insurance company, said of the LISA
it may not be clear to younger employees whether auto-enrolled pensions are the best thing for personal contributions. As such, there is a real danger that the Lifetime ISA could derail auto-enrolment and reverse the progress which has been made in encouraging people to save for later life. 92
The ABI concurred, noting that the LISA risked undermining AE’s great success in encouraging young people to save.93 Whilst young people who switch to the LISA are still saving, they will not be saving in the most effective way.
50.Age UK questioned the rationale of combining retirement and home savings and said that the timescales and appetites for risk are “so different for the two objectives that it would difficult for the ISA to develop an investment strategy to suit both needs.”94 The PLSA said that the option to take retirement savings early “severs the fundamental link between saving for retirement and maximising the chance of having an adequate income in retirement.”95 It also pointed out evidence from similar schemes in the US that showed that once money left retirement savings, it tended not to be replaced.96 Royal London noted that saving for a first home may have an “emotional attraction” that leads it to be prioritised over retirement saving.97
Problematic timing
51.Witnesses also questioned the timing of the LISA introduction. Now: Pensions told us
auto enrolment is at a critical stage and it is vital that any policy reform does not jeopardise its success. We therefore believe it is a dangerous time for the Government to introduce the Lifetime ISA that will prompt many people to make potentially life changing choices between two different types of savings vehicles.98
Royal London concurred:
By launching LISA before auto enrolment has fully worked its way through the system (many employers are yet to stage) the Government is jeopardising a successful and widely-supported policy which is starting to address the widespread issue of inadequate retirement savings.99
52.The Pensions Regulator (TPR) argued that by 2017, when the LISA is scheduled to be available, a significant number of additional employers will have passed their staging dates.100 There will still, however, be thousands of small and micro employers left to stage and the two increases in contribution rates will be yet to come. The Department itself highlighted the danger of changing major projects during implementation and suggested “we should wait until we get to the end of auto-enrolment” and then reflect on potential changes.101
Communication
53.We heard that signposting to guidance and advice would be crucial to ensuring young people are adequately informed to make good savings choices.102 Royal London said that guidance sources are “not geared up to serve” young people weighing up whether to opt out of AE in favour of a LISA.103 Aon, an insurance company, cautioned that young people may be a group “most at risk of making inappropriate decisions”.104
54.We heard various calls for the Government to play a more active role in helping people make financial choices around the LISA.105 DWP said “it is not the role of the Government to advise individuals how and where to invest their money.”106 Witnesses suggested, however, that the Government did have a responsibility to ensure that it did not misrepresent the relative merits of different savings products. For example, Prospect told us:
the presentation of the Government contribution to a Lifetime ISA as a 25% bonus could easily give many people the impression that it attracts a more favourable tax treatment than pension contributions.107
55.In announcing the LISA in the Budget, the Chancellor explained that young people “find pensions too complicated and inflexible”.108 By contrast, the ISA “brand” is trusted109 and has a reputation for simplicity.110 Steve Webb, former Pensions Minister, however, said that the LISA was the chancellor’s “shiny new initiative” that could undermine the progress of automatic enrolment.111 He questioned how young people would know which savings vehicle would be best for them.
LISA is unlikely to be a better option than AE
56.For most employees the decision to save in a LISA instead of through a workplace pension would be detrimental to their retirement savings.112 This is because, unlike a LISA, AE attracts employer contributions. The additional amounts that would be accrued in AE compared to a LISA vary substantially. Someone earning £25,000 per year and saving 4% each year in a workplace pension for 42 years may have accrued £50,000, or almost 50%, more than they would have done saving the same money in a LISA.113
57.The main groups of people who may be better off focusing their retirement savings in a LISA are those not well serviced by employer pensions. Most notably, self-employed people do not benefit from employer pension contributions. The flexibility offered by a LISA, which may be particularly valuable for the self-employed, may make it a more desirable option.114 We consider the self-employed further in the next chapter. Employees earning under £5,824 are not eligible for employer contributions, even if they opt-in to AE, and so a LISA may similarly suitable for such people.
58.The employees principally placed to benefit from retirement saving in a LISA are those who wish to supplement pension saving. If an individual is already benefiting from maximum employer pension contributions, depending on their tax circumstances a LISA may be a more attractive saving option than more employee contributions.115 Similarly, people who have reached their Annual or Lifetime Allowance for pension tax relief would have access to a tax-efficient means of saving more.
59.For some employees, notably higher earners, saving for retirement in a Lifetime ISA may complement pension saving. Those with a limited disposable income, however, will need to weigh competing priorities and many will be faced with the option to either save in a LISA or remain in their workplace pension. Whatever the attractions of the LISA, it must not be presented as a direct alternative to AE. Savings under AE carry an employer contribution, which will not be available in the LISA. Opting out of AE to save for retirement in a LISA will leave people worse off. Government messages on this issue have been mixed. While the DWP has been very clear that the LISA is not a pension product, the Treasury has proffered an alternative view. We recommend the Government develop a communications campaign that highlights the differences between the LISA and workplace pensions. It should make it clear that the LISA is not a pension and that, for employees who have been automatically enrolled, any decision to opt-out is likely to result in a worse outcome for their retirement. The Government should also conduct urgent research on any effect of the LISA on pension saving through AE. The findings of this research should be reported in time for the 2016 Autumn Statement. We will review that evidence before the introduction of the LISA.
80 HM Treasury, Budget 2016, 16 March 2016
81 Ibid
82 Gov.uk, The new Lifetime ISA
83 Aegon (PAE0043), Zurich (PAE0058)
84 Second Memorandum to the Work and Pensions Select Committee
85 Q343: Oral evidence on Intergenerational Fairness, HC 705 (Baroness Atlmann)
87 See,https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/508117/Lifetime_ISA_explained.pdf
90 Michael Johnson (PAE0038)
91 Royal London (PAE0050)
92 Zurich (PAE0058)
93 Association of British Insurers (PAE0062)
94 Age UK (PAE0042)
95 PLSA (PAE0063)
96 Ibid
97 Royal London (PAE0050)
98 Now: Pensions (PAE0057)
100 The Pensions Regulator (PAE0059)
102 Aviva (PAE0045)
105 Ibid
106 Second Memorandum to the Work and Pensions Select Committee
107 Prospect (PAE0053)
111 Financial Times, Budget: Lifetime Isa boost for younger savers
113 Ibid
© Parliamentary copyright 2015
Prepared 13 May 2016