The Treasury Committee’s Lifetime Isa review presents an opportunity to debate the marmite of all tax wrappers. It started out with great hope: young workers could save into a scheme (with a 25 per cent government bonus) that helped them buy their first house and/or save for retirement.
This kind of dual use was previously unheard of, and it was a huge bonus – literally – for younger generations struggling with soaring house prices and deposits. But it’s had its challenges. People are aware of it, which is a plus. But they’re generally only aware of it in terms of saving for their first house. Awareness levels as a pension savings product are low.
And its use for pensions savings is where the marmite effect comes in. Some are calling for the pension part to be removed so in effect it becomes a Help to Buy Isa Mark 2. The main argument being that combining two seemingly competing financial challenges is too confusing for consumers.
But in calling for its remodelling as a single purpose product we are potentially throwing away the one product that recognises that people have multiple financial challenges. And the Lisa deals with, arguably, the greatest two – first time house purchase and retirement. You satisfy the first challenge and continue saving for the ultimate one – retirement.
It’s a great complementary product to a workplace pension for basic rate taxpayers who are paying in the minimum and have maxed out on their employer contribution. The 25 per cent bonus is effectively equivalent to pensions tax relief and withdrawals from age 60 are both penalty and tax free.
And let’s face it the bonus is a lot easier to understand than pensions tax relief and so has more chance of incentivising people to save and save more!
But I concede that for the Lisa to be a serious pensions savings option, it needs some modernisation.
What needs to change
We often think of pensions as a siloed part of the UK’s wealth, investment and savings system. But to help solve pension issues we need to include the entire landscape in the debate. It all needs a rethink.
The Lisa has the essence of what a modern pension should be. If we were to start with a blank sheet of paper, would a modern pension not be more like the Lisa was intended to be, and the current name suggests: a ‘lifetime’ Isa?
But some things would need to change. The age limit on contributions needs to be increased beyond the current age of 50 so people can keep saving for retirement. The bonuses currently finish at 50, but that would also need to be extended in line with contributions for the same reason; and the maximum age of 40 to open a product should be removed.
That all seems good and well but isn’t that just reinventing the wheel? Well, no. And to understand this we need to step back a second and think about this from a saver’s perspective. Life is complicated and sometimes people need to access their nest eggs to deal with shorter term financial challenges. The intention is to leave funds untouched but events like the pandemic do happen.
Early access to pension savings is a controversial and debatable point – many will argue, with merit, gating prevents behavioural struggles. But the fact is the pensions lock-in can be a barrier to younger people saving more into their pension. So this is a debate we need to have openly.
We can’t just keep saying that people should be saving more for their retirement unless we have a solution to their concerns and help them address a lifetime of challenges that come way before retirement. To state the obvious, for younger people retirement is decades away. Getting on the housing ladder for instance, is a far more pressing challenge.
And so, providing young people the opportunity to save for a first home, while also saving for later life, helps fulfil a more immediate financial want – or, arguably, need. And the opportunity to access savings for financial challenges (albeit with a penalty) satisfies the “just in case” need. Plus, for basic rate taxpayers, the Lifetime Isa is at least equally as tax efficient as a traditional pension product, and it enjoys tax-free withdrawals from age 60.
But the current early withdrawal charge needs to reduce from 25% to 20%. Savers understand that the LISA is for getting on the housing ladder and/or saving for retirement but the 6.25% effective penalty for people accessing their own money is unfair, adds complexity and creates a barrier.
And the home purchase part?
Fundamentally the house purchase part works well but the limits need to change. The house price limit (currently £450,000) needs to be done away with. Although its impact is not universal, it creates perceived complexity. While the UK wide average house price is well below the cap, there are areas in the UK, especially London and the South East, where this is much higher.
The average deposit, according to Halifax, is now over £50,000. It’s more than doubled in 10 years. To reflect this shift, the £4,000 annual savings limit should be increased to account for historical inflation and then linked to inflation going forward.
What about auto enrolment?
Given that people in general just aren’t saving enough for later life, we need to ask the difficult questions and leave no stone unturned. We need to be really clear on what customers need and what can move the dial on adequacy, which is primarily about getting people to pay in more. Anything else is just tweaking.
Ultimately, if we want better savings levels, we need to get members engaged – engaged members are more likely to make better decisions including paying in more. There’s no silver bullet but engagement is more likely where we have a product that’s easy to understand and meets needs.
Research we commissioned in February 2023 shows that more than half of employees (59 per ent) agree that pensions need to do more than just provide for retirement. Two thirds (67 per cent) think they should have the ability to draw some money before retirement if needed.
And so if all necessary changes were made, including the tax treatment of employer contributions, why couldn’t the Lisa be approved as a qualifying workplace auto enrolment option?
It’s a massively controversial question. But if we need to get people saving more it’s through questioning the status quo that’s more likely to get us to a solution. At least it should open the wider conversation of how to move the dial on savings adequacy and help people achieve their life goals.
That’s what the long-term savings landscape should be about. If we look beyond ‘pensions’ for retirement and consider nest eggs to be used for multiple purposes, this can make a real difference to peoples’ lives.
