Learning to embrace Lisa, the lifetime Isa

George Osborne's Budget announcement that a new Lifetime Isa (Lisa) will be introduced from next April seems to have been met with mixed feelings, with many in the pensions industry complaining that the Lisa will undermine traditional pension saving.

We need to stop criticising and apply our energies towards helping employees get the most out of what a Lisa can offer.

Various commentators have questioned whether the government is using the introduction of the Lisa as a ‘Trojan horse’ to bring in a move towards a pension Isa through the back door.

Whether this is true or not (and it probably is true), what is clear at this point is that the direction of travel for the government is towards adding flexibility to retirement saving through products such as the Lisa.

It looks like the Lisa is here to stay and it is now the industry’s responsibility to turn its focus on how we can make it truly effective.

Facing problems in the future

One of the main criticisms of the Lisa has been that it could undermine the success of auto-enrolment. However while the early years of auto-enrolment may have proved to be a success on the surface with low levels of individuals opting out of the schemes they have been enrolled in, the project may face problems in the future.

Why? Well from 2018 the minimum employee contribution will rise from its current level of 0.8% of qualifying earnings to 2.4% and then 4% from 2019. As employees start to see a greater proportion of their earnings being syphoned off into a pension that they cannot touch until retirement, our experience shows that a sizeable section of employees could opt-out at this point, choosing to instead save nothing for retirement and pocket the money to spend immediately.

Offering a Lisa alternative for opt-out

Offering a Lisa alternative for individuals who do choose to opt-out might well encourage continued saving. They can use the Lisa money to buy their first home or, in extreme cases, access the cash (albeit with a charge and loss of bonus) if they really have too. The added flexibility that the Lisa offers can act as a way to keep younger generations engaged with long-term saving rather than walking away from it altogether.

One of my clients is looking at the idea of allowing its employees flexibility over where their contributions are invested (in other words, a pension or a Lisa) but will still require the employer’s contributions to be invested in pension.

I like this solution. It should encourage employees (particularly the under 40s) to continue to save without feeling like they are locking away their own money while, at the same time, helping them build up a pension fund. The employer can get some marketing spin too. “Helping you buy your first home” sounds a lot more exciting than “helping you save for your pension”.

The Lisa could have a huge impact on employees’ engagement with their long term savings. The UK is in love with the notion of buying a house more than the act of saving for a pension, and the Lisa offers an opportunity to save for retirement with an option to divert the funds toward the purchase of a first home at any stage in life.

We need to work towards an equilibrium that keeps individuals, employers and the government happy, but most importantly encourages people to save in one form or another for their future. Learning to embrace the Lisa will ultimately be a better use of time than resisting it.

Chris Noon is partner and head of workplace savings at Hymans Robertson.

This article was provided by Hymans Robertson.