The Government should include a Workplace Isa within auto-enrolment legislation to eliminate the risk of the Lifetime Isa impacting the rollout of the policy says Michael Johnson.
The Centre for Policy Studies fellow says such an approach would spare the Government the time and expense of tackling the issues raised in the recent DWP Committee report that highlights concerns that the Lifetime Isa could undermine the rollout of AE as individuals opt out of pension in favour of the new vehicle, missing out on the employer contribution.
The DWP Committee has recommended that the Government should develop a communications campaign that highlights the differences between the Lifetime Isa and workplace pensions and conduct urgent research on any effect of the Lifetime Isa on pension saving through AE, to report ahead of the 2016 Autumn Statement.
Johnson says employer contributions, taxed at the employee’s marginal rate, should be paid into a Workplace Isa until the age of 50, in the same way as the Lifetime Isa, attracting the same 25 per cent Treasury bonus as that intended for the Lifetime Isa.
Johnson’s proposal sees withdrawals from the Workplace Isa restricted until the age of 60 after which they would be tax-free. Auto-enrolment employee contributions, made with post-tax income, would be paid directly into the employee’s Lifetime Isa. They would be subject to the same tax, withdrawal and penalty rules as other Lifetime Isa savings and be eligible for the Treasury’s 25 per cent bonus.
Employer and employee contributions would share an annual contributions cap of £10,000, subject to Treasury cost modelling.
The Workplace Isa could be housed within the Lifetime Isa, leaving the individual with a single retirement savings vehicle says Johnson.
Workplace ISA assets would enjoy the same Inheritance Tax treatment as today’s pension pots and should be excluded for means testing purposes, as are today’s pension assets.
Johnson says: “The Lifetime and Workplace Isas, operating together within the auto-enrolment framework, would help many people of modest means achieve a goal that was originally proposed in a 2012 paper aimed at catalysing the broad-based savings culture that the UK so desperately needs. The majority of the population should be encouraged to set themselves one simple goal at the point of retirement: to be a debt-free home owner, including no consumer debt. Thereafter, they could perhaps downsize to top-up their retirement income, and perhaps finance long-term care.
“Ideally, the Workplace Isa will be announced in the 2016 Autumn Statement, after a summer spent assessing the public’s response to the Lifetime Isa, perhaps for 2018 implementation. It would, of course, compete with today’s occupational pensions savings schemes.”