Spence & Partners latest blog for Pension Funds Online
Following the Chancellor’s recent announcement on the creation of the new Lifetime ISA the industry found itself asking whether the UK is just one generation away from the death of pensions.
The introduction of the Lifetime ISA (LISA) provides an attractive new savings opportunity but only for the under 40s – yes, the Government is allowed to be age discriminatory even if businesses aren’t.
However, at what cost?
Will the younger generation, faced with a choice between a flexible ISA-style product with a government-funded bonus and locking their savings away in a vehicle they don’t understand, leave pension saving to “more mature” workers?
The under 40s now have a complex decision to make when deciding where to save their hard earned money. They will have to balance a number of competing factors, and there is a clear need for guidance to help them navigate through the maze.
LISAs will provide savers with substantial flexibility, and for basic rate taxpayers the tax benefits are likely to be better than a pension (a bonus equivalent to basic rate tax relief on the way in, and tax-free on the way out).
It is true that the LISA annual allowance is just one tenth of that in a pension, but that is likely to be an issue only for a few.
For higher rate taxpayers LISA’s tax benefits are less generous than pensions, but the additional flexibility on offer might still attract contributions away from pensions and into LISAs.
Countering this is the issue of employer contributions.
How much “free cash” would an employee sacrifice by choosing a personal LISA over an employer-funded pension, and is this worth the additional flexibility?
For some people, the attraction of not locking their money away will outweigh the financial benefits of doing so, for many this will be the primary driver in making their decision to choose LISAs over pensions.
Younger workers now have a choice to make between pensions, LISAs, ISAs, help-to-buy ISAs and normal savings.
Each of these have different rules, but only one has the benefit of employer contributions.
It seems odd that, just as the Government is pushing through auto-enrolment legislation, it introduces a new product that will discourage millions of people from saving into a pension.
The issues are complex. From a purely financial perspective, for some the “right answer” will be LISAs, whereas others will be better off investing in pensions.
Some people will carefully consider all the issues and reach a conclusion one way or the other, however, many people will end up making the wrong decision if all the facts and clear, easily-accessible guidance is not made available.
The need for effective guidance and advice has never been so strong – the question now is whether we are all up for the challenge?