Employees should be given the freedom to choose whether their auto-enrolment contributions go into their occupational pension, a Lifetime Isa or a new Workplace Isa, under radical proposals outlined by Centre for Policy Studies fellow Michael Johnson.
In a new report, The Workplace Isa, Johnson calls for the establishment of a Workplace Isa structure that is, with Lifetime Isa capability, brought into the auto-enrolment framework. The Workplace Isa would be available to those under age 40.
Johnson argues the flexibility of access to Lifetime Isa contributions would discourage employees from opting out of auto-enrolment as employee contributions rise to the full 5 per cent of band earnings.
Johnson says because more than half of the working age population is ineligible for auto-enrolment, including 23 per cent of employees, the DWP should sponsor a Workplace ISA for them, perhaps delivered through Nest.
NICs relief on employer contributions should be stopped, to pay for the bonus. Johnson says it currently goes to shareholders rather than savers, as employees are oblivious of it.
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.
Key features of Johnson’s Workplace Isa:
- The Workplace Isa should be included in the auto-enrolment (AE) legislation. It should be open to all auto-enrolled employees under the age of 40.
- Employer contributions, taxed at the employee’s marginal rate, may be paid into a Workplace Isa until the age of 50 (as per the Lifetime Isa). They should be accompanied by the same 25 per cent Treasury bonus as that intended for the Lifetime Isa.
- Withdrawals from the Workplace Isa should not be permitted until the age of 60. Thereafter, they would be tax-free.
- Auto-enrolled employee contributions, made with post-tax income, may 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. They should also be eligible for the Treasury’s 25 per cent bonus.
- Employer and employee contributions should 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.
- Workplace Isa assets should enjoy the same Inheritance Tax treatment as today’s pension pots and should be excluded for means testing purposes in the same way as today’s pension assets.