A recent report from the Work and Pensions Committee has raised concern that the Lifetime Isa could lure people out of pensions, but the industry is divided over whether Lisas are a threat or potential boon for auto-enrolment.
The announcement of a Lifetime Isa for under-40s rang alarm bells with many in the pensions industry, who fear that younger savers could be tempted to opt out of auto-enrolment – seen thus far as a success – as contribution rate increases combine with the introduction of the Lisa and its promise of early access, albeit with a punitive 5 per cent penalty charge if taken as cash before age 60.
Both pensions and Isas can lock you in. People won’t opt out to opt into something so similar
Steve Webb, director of policy at provider Royal London, said he doubted that a rise in contributions to 8 per cent would lead to many opt-outs. “The effect [of contribution rises] will be limited, as the increases will be small,” he said, adding they will be increased from a low base to begin with.
He said he sees the Lisa as a bigger threat to auto-enrolment implementation than contribution rises.
“In an auto-enrolment context, the Lisa is a wholly negative development,” Webb said, because young people interested in buying a house might get caught in an opting-out cycle, leaving them with neither an adequate deposit nor a secure pension.
However, he conceded that the Lisa can be a viable option for some. “The self-employed are not within the scope of auto-enrolment, [so Lisas] might be the right option for them,” he noted.
Incorporating the Lisa into auto-enrolment would be ill-advised, said Webb. “If the question is, 'Should the government change the entire auto-enrolment set-up right now?' the answer is a categorical ‘No’.”
The focus should now be entirely on auto-enrolment implementation, he urged.
Red herring
Chris Noon, a partner at consultancy Hymans Robertson, said that competition between auto-enrolment and Lisas was “a bit of a red herring”.
Lifetime Isas are not a threat to auto-enrolment, he said, because “both pensions and Isas can lock you in” with early-withdrawal penalties, so “people won’t opt out to opt into something so similar”.
However, he said he had already observed clients reacting to contribution hikes. “More people will opt out of auto-enrolment as employee contributions increase to 5 per cent by 2019”.
Noon said for lower earners paying 0 per cent tax “the Lisa generally is a viable alternative”, but that there are caveats. Isas are more expensive products because they incur higher charges, while governance is less strong.
Ultimately, Noon said, treating auto-enrolment and Lisas as competitors could be dangerous. “If Isas become a pension alternative, there will be chaos,” he warned.
“We should realise sooner rather than later that just because it looks and smells like a pension, it doesn’t mean it is one”.
“They should be used in conjunction, not either/or… [and] we should encourage the government to run them in parallel,” he said.
Perception game
Morten Nilsson, chief executive of Now Pensions, a UK mastertrust, said that “the Lisa is confusing at a crucial time in auto-enrolment implementation”.
“For many young professionals, a 25 per cent top-up is more attractive than employer contributions” in auto-enrolment schemes, Nilsson said. He said the danger is that this group could access funds too early and have nothing at retirement.
He stressed that “the Lisa is not a [pension] alternative… the Lisa will be used for property, not long-term pension saving”, and as such should not be replacing pension schemes or be incorporated into them.
“It’s better for people to have different products to buy,” he said. “Now, minimum contributions to auto-enrolment are just too low, and people need to save more, but the Lisa isn’t the solution”.
“People imagine Lisas are cheap, but often they’re not,” Nilsson said, noting that there was a mismatch between perception and reality with Isas. “This is a perception game, which is dangerous, as this should be about people and their savings.”
