Ian Wright: What does the Lisa mean for pensions auto-enrolment?

In the lead up to the Budget, there was much speculation about the changes that the Chancellor might announce to pensions. However, he backed away from further changes to pension schemes, and instead announced a new Lifetime Isa (Lisa).

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Crucially for younger workers, all the funds in the Lisa (including the government bonus) can be withdrawn earlier for the purpose of purchasing a first home.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