Ian Wright: What does the Lisa mean for pensions auto-enrolment?
This will enable 18 to 40-year olds to save up to £4,000 per annum up to the age of 50 and the government will provide a 25% bonus to cash invested at the end of each tax year. The Lisa could also receive interest or investment growth, and all the savings can be taken tax-free in retirement.
Assuming annual fund growth of 5%, a 25-year old contributing £4,000 a year could have a tax-free pot of over £416,000 by the age of 60 – a sizeable retirement fund – according to Legal and General Investment Management.
Crucially for younger workers, all the funds in the Lisa (including the government bonus) can be withdrawn earlier for the purpose of purchasing a first home. This is one of the main reasons why it is difficult to engage young employees in pensions – they have high rents and student debts to pay, and any savings they can afford to make, they want to put aside for a deposit to get on the property ladder.
According to the Halifax, the average deposit for a first-time buyer is now £33,000 (and £91,000 in Greater London). So the Lisa is likely to look much more attractive to this demographic than a company pension scheme – despite the fact that company contributions to a pension are likely to be a much higher proportion of an employee’s contribution than the government’s 25% enhancement of LISA contributions.
So how is this likely to affect auto-enrolment, now that the staging dates for large and medium-sized business to auto-enrol their employees into pension schemes has passed and the final staging date for organisations with fewer than 30 employees is less than a year away?
While employees may choose to opt-out of their employer’s pension, there are strict rules put in place by the Pensions Regulator to ensure that companies do not induce job-holders to opt-out. Is this not exactly what the government is now doing with the new Lifetime ISA?
Auto-enrolment has been a great success, with less than 10% opting-out in the first year, according to the Department for Work and Pensions’ own figures. How will this change now, particularly amongst those younger workers that auto-enrolment was designed to benefit?
In July 2015, the government proudly published the findings of a DWP auto-enrolment study with the headline: “Young people in particular are among the biggest winners”, highlighting how the number of young people in the private sector saving into a pension scheme had more than doubled in two years.
It would be interesting to know what the DWP make of this Treasury announcement – I expect the opt-out rates amongst young people to soar once the Lisa is launched in 2017.
Ian Wright is senior manager, Compensation & Benefits EMEA, at VMware