Young workers saving to buy a home may opt out of auto-enrolment in favour of the new Lifetime Isa (Lisa), industry figures are warning.
The Lisa, being introduce in a year’s time, offers lower financial incentives than pension, but fears are growing that the massively increased flexibility they offer – specifically with regard to access for house purchase – may be enough to persuade some younger savers to divert pension saving to the new vehicle.
For employees paying 20 per cent tax both in work and in retirement, the different in incentives between pension and Isa may not be enough to overcome the behavioural bias for cash accessible today over that in the distant future – the phenomenon known as hyperbolic discounting.
Ignoring investment growth and inflation, a 20 per cent taxpayer in both work and retirement who foregoes £4 of taxed earnings into an auto-enrolment pension receives back £6.80 in decumulation after tax. Alternatively, by opting for the Lisa, he or she receives £5, but can access it any time for the purposes of house purchase deposit, the top financial priority of millions of millennial savers.
Aegon UK head of pensions Kate Smith says: “There is complexity in the number of different vehicles people can save in. The worry is people might opt out and put money in a Lisa. This is a challenge for pensions and one we will have to work through. This goes contrary to the direction of FAMR which is all about workplace being a good place to save and get retirement advice. In an ideal world people would do both, but that is not realistic for everyone.
“If we start to see opt-outs go through the roof then the Government will have to take a look at this. And it is not just opt-outs, but also those who leave after more than two months.
“But this also paves the way for a pension Isa, which may make this issue redundant.”
Chase de Vere Sean McSweeney says: “If I was under 40 on £30,000 living in London and trying to save a deposit for a house, I would be severely tempted to opt out of pension and put it in a Lisa. You have to ask whether this is a way of undermining pensions in the medium term, and support the 1.8m employers yet to stage by increasing opt-outs. Or it may be part of the grand move to TEE.”
Towers Watson senior consultant David Robbins says: “It is not clear that people will opt out – people haven’t opted out to go into alternative vehicles so far. It is not clear yet how the Lifetime Isa rules will impact auto-enrolment regulations, if at all.”
Scottish Widows head of industry development Pete Glancy says: “You are still better off getting employer contributions – the incentives offered through auto-enrolment still outweigh those offered by the Lifetime Isa.”