A balancing act: Will the Lisa meet its dual objectives?

This new vehicle is neither pension nor Isa in their truest senses but it purports to offer some of the benefits of both, and has split the lifetime savings industry as to whether it brings new flexibility for long-term savers or creates yet more confusion and complexity.

The Lisa is only available to those who will be under 40 years old after April 1 2017. It is designed to allow tax-efficient saving either for retirement or a first time property purchase.

Contributions to the Lisa will be paid after income tax and form part of the overall £20,000 annual Isa allowance, with government paying a 25 per cent yearly bonus on the first £4,000 saved.

Withdrawals may only be made if the saver is aged 60 or over; otherwise only if they are using it to buy their first home or the individual is terminally ill.

Any money taken outside of these stipulations will be subject to a 5 per cent charge, and savers must return any bonuses to the government.

Research from law firm Sackers suggests employers are already looking at including the Lisa on workplace savings platforms. In a survey of 70 employers published in April, more than two-fifths of employers said they would consider offering a Lisa to their workforces.

However, placing a Lisa in the workplace will still not make it as attractive as a defined contribution pension, say industry commentators.

Pensions still ahead

Peter Glancy, head of industry development at Scottish Widows, says employer contributions give DC pensions the edge over the Lisa, especially where these are particularly generous.

He notes that even under auto-enrolment, by 2019 employer contributions will be 3 per cent and employee contributions 4 per cent, with the addition of a 1 per cent government top-up.

Glancy says: “If we think about the employee contribution being the investment made by the saver, then the employer contribution is effectively an immediate and very generous return on that investment, which cannot be matched by Lisas.”

However, the Lisa looks to turn the heads of the self-employed.

Steven Cameron, pensions director at Aegon, says: “For individuals such as the self-employed, who have no chance of an employer pension contribution, the ability to save with a government bonus for retirement will have appeal.”

The housing crisis is another driving force behind the possible Lisa appeal as young people search for a means of getting on the property ladder.

Danny Cox, chartered financial planner at Hargreaves Lansdown, says: “We expect the Lisa to appeal to those saving for their future who haven’t yet bought their first house [and] those already saving into a help-to-buy Isa who should look to move their savings to a Lisa to benefit from a more immediate bonus.”

Investment objectives

However, the fear from some in the industry is that saving for a deposit on a house over the short to medium term is an entirely different objective to that of saving for retirement. As such, Lisa savers could find their money is invested inappropriately should their goals change.

Cameron goes as far as calling the two objectives “incompatible”, and warns savers against thinking a Lisa can cater for both house purchase and retirement saving.

Cameron says: “The Lifetime Isa is very unlikely to offer the best of both worlds to those with a dual savings objective. If a house deposit is your primary aim, the Lifetime Isa is attractive, but don’t let yourself pretend it’s also taking care of your retirement planning.”

Investing over the short or medium term typically means steering clear of stock market volatility. This in itself is fraught with challenges since the poor returns from cash-type investments means they may not keep pace with house price inflation.

Saving for retirement meanwhile means taking a more risky investment strategy, incorporating volatile asset classes such as equities, as these have generally provided a more attractive return over the long term.

Mark Pemberthy, director at JLT Employee Benefits, says: “One of the benefits of knowing you are investing for the long term is that you can expose money to genuine growth investment. If you are saving for a housing deposit you are not going to want significant exposure to equity markets, meaning the Lisa investment objective in that case should be more cautious.”

He adds: “This presents a challenge, since there is potential for a massively detrimental impact if the saver’s short-term objective turns into a long-term one.”

Pemberthy says those investing on behalf of Lisa savers may not know their clients’ investment objectives, making it more difficult to design the optimum strategy. This gives DC the edge as there is only one objective: invest for long-term growth.

Patrick Connolly, certified financial planner at independent adviser Chase de Vere, says the Lisa may also cost younger savers dearly if they prioritise property saving over receiving the contributions from their employer’s workplace DC plan.

Connolly says: “Many people in their 20s and 30s are more focused on getting on the property ladder than on saving for their retirement, and so it wouldn’t be a great surprise to see these people investing in Lifetime Isas in preference to pensions, especially where they can’t afford to save in both. This is likely to be a mistake, as most people should still be investing into a pension – ideally a company pension scheme – as early as possible and save as much as they can afford.”

Where savers are unsure as to the primary objective for their Lisa saving, strategies could incorporate exposure to equities to allow for some long-term growth but include a form of guarantee that would lock in gains should a house deposit become the target.

First round of patching

The Lisa is still under construction and there are those who would like to see changes to its current form. The Centre for Policy Studies, which is behind much of the thinking for the Lisa, is calling on government to make six amendments over time, to “broaden its appeal” (see boxout).

Michael Johnson, author of the CPS report detailing the next steps, says he wants the Lisa to help “merge the disparate worlds of ‘pensions saving’ and ‘saving’ into a single, coherent framework”.

Should the government grant the CPS its six wishes, there are those who fear pension saving could be undermined.

One of the benefits of knowing you are investing for the long term is that you can expose money to genuine growth investment. If you are saving for a housing deposit you are not going to want significant exposure to equity markets

Mark Pemberthy, JLT Employee Benefits

Connolly says a beefed-up version of the Lisa will lure more savers away from traditional pension plans.

“The more attractive the Lisa becomes, the more of a threat it will be to pensions. Similarly, if changes are made which make pensions less attractive, perhaps by scaling back higher and additional-rate tax relief, then Lisas would look better by comparison.”

While the Lisa is yet to be fully formed, Pemberthy says the interest generated by the new vehicle is almost comparable to that of freedom and choice a year earlier. Yet there are serious challenges to iron out, not least the cavernous gap between saving for the long-term retirement objective and that of saving for a property.

The DC market has been working hard to understand its membership and is also ahead on tax efficiency and employer commitment.

The Lisa’s flexibility makes it attractive to the younger generation, but they will need to be sophisticated enough to tackle the possibility of dual savings objectives.

The role of the employer and its ability to include Lisas in workplace benefits packages will also play a critical role in the new product’s success.

Gill Wadsworth is a freelance journalist