JLT Employee Benefits’ Mark Pemberthy explains where he stands in terms of pensions and the lifetime Isa.
Savings in summary
• Pensions usually include a matching employer contribution and provide both tax and national insurance relief
• An Isa also has tax benefits and can allow younger savers to access money in the shorter term
• A lifetime Isa will be introduced in 2017 – it will include government contributions and offer long-term savings to those under 40
Employers have a vested interest in ensuring their employees are saving enough for retirement, but they also want to provide a benefits package which is attractive.
While the lifetime Isa offers a more holistic approach to tax-incentivised saving, pensions are still a core employer sponsored benefit. How could these solutions work together in terms of workplace benefits?
One size does not fit all
For some employees a pension may not be a high priority, whereas help getting on the housing ladder or paying off debt more quickly could be very attractive. This does not just apply to younger workers. Alternative savings schemes are also relevant for high earners who have been restricted or excluded from pension saving.
For some employees a pension may not be a high priority, whereas help getting on the housing ladder or paying off debt more quickly could be very attractive
Common practice has been for these employees to receive a cash supplement in lieu of their employer pension contribution; however, paying cash does not underpin a savings ethos or require matched employee contributions.
Research indicates one in five employers are considering using workplace savings schemes rather than a cash supplement for when pensions saving is restricted. This creates a blueprint for providing flexibility to other employees.
Workplace savings schemes can include an Isa and a general investment account. Contributions can be made through payroll and employers typically mirror the contribution design of the pension scheme, albeit without the national insurance and income tax relief benefits.
They will also include the Lisa in 2017, giving employers the ability to provide an even wider range of savings options that employees can mix and match, subject to practical considerations in respect of auto-enrolment, administration, communication and cost.
But which is better?
If an employer is not prepared to divert pension contributions to workplace savings, then the pension will always be a clear winner.
However, if the employer is willing to co-fund workplace savings the situation becomes more nuanced, particularly in respect of the Lisa.
Modelling a number of scenarios of pension only versus combined strategies (pension and Lisa), the outcomes are, simplistically, a variation between a bigger ‘pot’ at a specified age, more flexibility, and more tax-free cash.
In addition to saving for a housing deposit, a Lisa may be attractive to those who need a large capital sum at retirement, for example to relocate or pay off a mortgage or other debt at the point at which they would like to stop working.
Retirement saving is important and a pension is still a core workplace benefit, but for many employers a more flexible approach will help employees tailor their saving to the different stages of their life.
Retirement is not necessarily the only financial goal for savers; and those that can afford to save into a pension, an Isa and a Lisa will benefit from a very versatile savings strategy that could meet any number of short, medium and long-term objectives.
Mark Pemberthy is director at consultancy JLT Employee Benefits
