There are binary opinions about the Lifetime ISA (LISA), for some it is start of a new era for retirement savings, for others it is a spurious gimmick. The technical facts behind the Chancellor’s announcement in the 2016 Budget are easy to understand and simple to explain. You can take out a lifetime ISA if you between 18 and 40 and contribute to it till you are 50. You can contribute up to £4,000pa from your own resources (there is not a workplace option).
For every four pounds contributed the Government will contribute a pound. You can have the full value of the Government contribution provided you are a first time buyer and putting the savings in your LISA towards purchasing a house for £450,000 or less. You can also have full value if you take your LISA after your 60th birthday. Otherwise you can take your LISA when you please but you won’t get the value of the incentive and you’ll lose 5% of the principal.
These simple to understand rules have won approval from consumer champion Martin Lewis who writes
“the clever bit of behavioural economics behind this is that by saying there’s a maximum amount to save to get the maximum bonus, you set an achievable target pushing people to save to try and reach it. Contrast this with pension, where limits are so high as to be meaningless to most –they provide no encouragement for you to try and reach them”.
Steve Webb has been less complimentary, leading the warnings that LISA may be a Trojan Horse, opening the gates to the Pension or Workplace ISA which might threaten the workplace pension as an auto-enrolment savings vehicle. Michael Johnson, largely considered the architect of LISA, has made no bones about it
Next step is to introduce the Workplace ISA, to be housed within the Lifetime ISA. In time, all other ISAs will disappear leaving everyone with a single savings vehicle to serve from cradle to grave.
The target market for LISA is the aspiring house purchaser and younger savers intimidated by the thought of tying money up for up to 40 years. The target market for a workplace ISA might very well be the workplace pension. Were workplace ISAs to qualify as an alternative to master trusts and Group Personal Pensions as a home for auto-enrolment savings, then claims about the “death of pensions” would become deafening. But that threat seems a long-way off. The immediate worry for auto-enrolment schemes is that the attraction of LISA will increase opt-outs from auto-enrolment.
Martin Lewis strongly warns against young savers giving up on workplace pensions and the employer contributions that auto-enrolment entitles them to. Should young savers ignore his advice then the arguments to incentivize pension saving using the taxation system governing ISAs may spur the Treasury to the radical reform of pension taxation promised in 2015’s budget. The incentive to move to a system where pensions are paid from taxed income, the TEE (taxed-exempt-exempt) approach could not just be justified by the popularity of the lifetime ISA but by the Treasury’s need to balance the books. Despite the Chancellor’s best efforts to talk up his efforts to date, the attraction of bringing forward tax revenues in the remaining years of this parliament may become a political no-brainer.
This is why many experts see LISA as neither genius or gimmick but as a “proof of concept” experiment. With self-employed saving into personal pensions in decline, the competition looks weak. We are about to enter into a relatively short consultation period before LISA’s implementation in April 2017, during this period we’ll learn more about the way that LISA will be regulated and how its investment objectives will be laid out. If LISA is to be properly considered a long-term savings product then we can expect it to be invested in long-term assets, if however, it is primarily to be targeted as a means to build up a housing deposit, then a shorter term (deposit based) investment strategy may be more suitable.
The worry for Regulators will be the consequences of young people investing for retirement in a strategy better suited to short-term saving and vice versa. Certainly house-owners continuing to use LISA will be well advised to use asset-backed strategies such as equities. It will be an interesting test for the highly touted robo-advisers as to whether they can help people get these strategies right.
It will also be interesting to see whether employers promote financial advice on this product in the workplace, following its promotion by the Financial Advice Market Review. The Budget gave a further boost to workplace advice by extending the amount employers can pay for advice from £150 to £500 per employee. In conjunction with this concession, the Treasury has allowed the cost of financial advice on retirement savings to be met by a deduction from an individual’s pension pot. It would be ironic indeed if the outcome of advice paid for from pensions was to switch future savings into ISAs!
Whether you view LISA as genius or gimmick, it is clearly the direction of travel for our retirement savings. For young people, the aspiration to share in the prosperity that housing wealth has brought to previous generations is the principal driver for their spending and saving behavior. Linking retirement saving to this aspiration may well capture the popular imagination in the same way that the pension freedoms have.
Perhaps this will be the lasting legacy of LISA, for while the scope of LISA in itself looks relatively limited, its capacity to restore confidence in retirement saving is substantial. For those who see the genius of LISA, it is this view that will be to the fore. For those who see it as no more than a gimmick will point to the irresponsibility of allowing 100% of retirement savings to be taken as early as 60 – in cash. For the purist, the pension – an income that lasts as long as you do – will remain the holy grail.
The next twelve months is likely to see an increasing rivalry between the two systems of retirement saving. This debate looks set to be healthy and productive. By propelling lifetime saving to the center of his budget, George Osborne may have gone some way to achieving the radical overhaul he promised, perhaps when our European referendum is over and with the 2017 autumn statement in sight, further change to pensions will be back on the agenda.