Given the Lifetime Isa reform has cost the Chancellor money not saved it, it is hard to view the Budget changes as the end of the story. Whatever happens after Brexit, the conversation around auto-enrolment will never be the same again writes John Greenwood
The Lifetime Isa raises a lot of questions about auto-enrolment into pensions, whether as a stalking horse for a complete overhaul of the tax relief system or as an alternative standalone wrapper in its own right. The one certainty from this year’s Budget is that, for the under-40s at least, pension saving will never be the same again.
For any younger worker saving to buy a property, the Lifetime Isa should be the first port of call. Given the maths, opting out of AE is entirely rational, even if the employer contribution is forgone. For example, for basic-rate taxpayers in both work and retirement, £4 of take-home pay forgoes into a Lifetime Isa, turning into £5 towards a property purchase that can itself form the basis of retirement planning, compared to £6.80 from age 57 in a pension.
The questions then are: will they bother to switch out and how should corporate advisers communicate the alternatives to them?
Strict rules control inducements to opt out of AE and, while no guidance on the issue as it relates to the Lifetime Isa has yet been published, Spence & Partners founder Brian Spence believes corporate advisers should be brave enough to tell employers how to arrange their benefits in a way that best suits their employees’ needs, which, when it comes to workers under 40, should include the Lifetime Isa as an alternative.
“For enlightened employees, employers will be comfortable with making contributions to a Lifetime Isa rather than to auto-enrolment. This seems a very attractive alternative compared to locking money away until you are 57 or more and being subject to the complexity of pensions and whatever other changes come down the line,” he says.
But not all employers will voluntarily choose to divert their matching contributions into a Lifetime Isa. Punter Southall principal Neil Latham says: “I saw an employer the day after the Budget; it has 50 employees, most of whom are in their 20s. I asked: ‘What would you rather do? Offer them a pension or this new Lifetime Isa?’ It said, if employees decided to go for the Lifetime Isa, that would be their choice and it would not deliver its own contribution.”
Employers will offer different approaches depending on the extent to which they are looking to attract, retain and motivate employees as opposed to doing the minimum needed to comply with the AE regulations. Whether the incentive offered within the Lifetime Isa comes to replace the tax relief available on AE pensions in a switch from EET to TEE remains to be seen. What seems inevitable is that a new form of workplace Isa, in the form of a Lifetime Isa offered through the workplace, will now become a reality.
Hargreaves Lansdown plans to offer such an arrangement and it seems inevitable that all group pension providers will follow suit.
Hargreaves head of pensions policy Tom McPhail says: “Depending on the final rules, it looks likely we will offer a Lifetime Isa as part of our workplace savings offering. Our initial thoughts are that it represents a great way to help employers engage their 20-somethings with their benefit package and will help them establish that all-important savings habit. For most employers, this group of employees has persistently been hard to interest in saving.
“But there are a lot of issues to work through first. The admin will have its complexities and there will be communications challenges. Would employers that offer this function offer the same for a conventional Isa? Ultimately, for those with savings goals not focused on retirement or first-time house purchase, a conventional Isa still represents a more sensible option due to the exit penalties of the Lifetime Isa. Also, staff may take up the Lifetime Isa to up their take-home pay by washing it through the plan, despite the exit penalties. The introduction of the Lifetime Isa makes an understanding of why you are saving and for how long even more important.”
Latham notes that, if the Lifetime Isa becomes the vehicle of choice for the under-40s – whether as a result of a pension Isa replacing tax relief or simply by younger savers voting with their feet and opting out of AE in favour of the new vehicle – withdrawal rates will need to be carefully monitored.
He says: “We need to know what will be left at retirement. We are already hearing of people in Australia running out of money. How likely are people to withdraw the lot to spend today? We need good research on this.”
Given that the Lifetime Isa reform has cost the Chancellor money, not saved it, it is hard to view the Budget changes as the end of the story. But, for now, advisers, providers, employers and other stakeholders must read the tealeaves as best they can and position their propositions to cover all outcomes.