What the Lisa effect means for employees and employers

In my last blog I predicted that we might see the end of relief on National Insurance Contributions (NICs) for employers. Thankfully for employers NICs seem to be safe for now.

However the Chancellor’s announcement of the new Lifetime Savings Isa (Lisa) suggests that rather than make immediate cuts, the government is going to gradually phase in a pensions Isa and further reform through the back door. In time the introduction of Lisas could come to be seen as a ‘pensions Trojan horse’.

How will Lisas impact pensions in the future?

A debate has already begun about how Lisas will impact pensions in the future. The Chancellor has set out his direction. I imagine he would have liked to go further, yet at such a politically sensitive time he couldn’t risk it.

There are two main points for employers to consider initially:

Firstly that Lisas will become a real value add benefit for attracting and retaining younger talent.
Secondly the rules around life time allowances (LTA) and annual allowances (AA) remain so employers need to have a clear strategy for high earners and those likely to hit life time allowance.

Lisas will be attractive to many who want to have a more flexible way of saving. It’s particularly attractive for those in the 20% tax bracket. However, it’s also really attractive for high flyers, who may be in the 40% bracket, but are worried their pension savings could breach any life time allowance limits (the Lisa is an Isa, so doesn’t count towards pension savings or limits or allowances).

What to consider?

However, there are things that need careful consideration. After so much effort has been put into the introduction of auto enrolment, with many employers offering good matching rates, we need to ensure people continue to understand the value of that. Therefore a really well thought through communication plan is key.

A clear investment strategy will also be vital. Around 80% of Isa money is held in cash. If people started putting long term savings only into cash they could lose up to 60% of value, compared with a more balanced investment strategy.

A few days before the Budget the Financial Conduct Authority (FCA) released findings from the Financial Markets Advice Review. Essentially, the FCA are looking for employers to take a more active role in educating staff around retirement.

The Budget then increased the amount employers can contribute (tax free) to advice from £150 to £500. It’s a clear sign the government is looking for employers to play a much more active role in supporting employees understanding of the choices they have. Now we have the Lisa, employees have even more choices than ever.

Risks for all if you get it wrong

The Lisa has saved NICs, but it has also saved LTA, AA and tapered annual allowance (TAA). I won’t go into great detail on these, but the key thing you need to know is employers could have staff impacted by limits on the amount they can pay into a pension or limits on how big their pension pot can get. If they make wrong decisions, or employers don’t help them understand choices then they, and potentially the employer could be liable for a tax charge.

It’s important employers get the right support and have a clear plan for implementing both LISAs and the challenges of allowances and limitations remaining.

Now for my next prediction – if the Chancellor remains in number 11 we will see an extension of Lisa to cover all ages.

It’s another reason to get on the front foot and build a clear strategy to help engage your employees sooner rather than later.

This article was written by Patrick Bloomfield, partner at Hymans Robertson.