The LISA conundrum: a barrage of buyer beware
Has the launch of a savings product ever come with such a barrage of buyer beware commentary as that for the Lifetime ISA (LISA)?
Top of the list of concerns is employees perceiving that they have been given a straight choice between a LISA or a pension scheme. No risk averse employer ever wants to be accused of helping their employers on to the housing ladder at the expense of providing them with a decent income in retirement.
Ideally, a LISA provides a helpful step-up for young employees looking to purchase their first property, while also taking advantage of their company pension scheme. However, if an employee chooses a LISA over a pension there needs to be assurance that they have done the right thing.
The Universities Superannuation Scheme (USS) has already put a lot of thought into this. Writing in Employee Benefits magazine, Mel Duffield, head of pension strategy and insight at USS, says their scheme will provide a simple compare and contrast between the key features of the LISA and saving with USS to its members.
“Hopefully, for those of our members that can afford it, we can encourage more saving for a property and for retirement, rather than one or the other,” she says, adding that wherever an employee is in doubt, they can get independent financial advice.
At this point it is worth restating the basic features of a LISA.
- It can be started by anyone aged 18-39
- Up to £4,000 a year can be contributed with the government matching 25 percent of what has been saved until the employee is aged 50
- It can be withdrawn by those who can prove they are first-time home buyers explicitly using it as a deposit payment towards a mortgage
- Alternatively, on their 60th birthday the employee can take out their savings as a tax-free lump sum
- Anyone accessing it before then without using it to purchase a property will suffer a 25% penalty on any amount encashed.
Chris McWilliam, principal consultant at Aon Employee Benefits, says that the biggest area employees should consider if they choose a LISA and not a pension is missing out on matching employer contributions. Secondly, they will also miss out on the tax relief awarded to pension contributions. For higher rate tax payers, they will miss out on tax relief at a higher rate of at least 40%.
He adds that some of the strongest employer interest for LISA is for those with high earners who are at the limits of their annual allowance for pension contributions. This is one example, he says, of how a sensibly communicated LISA product can widen the benefit choice for employees.
This article was provided by Aon Employee Benefits.
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