Do pensions really need more competition with houses?

Will the new Lifetime ISA lead to more young people choosing buying a home over saving for a pension? Sara Benwell thinks so

One of the perceived problems with Lifetime ISAs (LISAs) is whether they will deepen the divide between home-buying and pensions.

 

 

 

 

 

Osborne sold the LISA as the ultimate flexible long-term savings vehicle. He said: “You don’t have to choose between saving for your first home, or saving for your retirement.”

This is bunkum.

Clearly someone saving in a lifetime ISA will, at some point, have to choose between leaving their savings where they are and building up a bigger pension pot, or buying a house.

With widespread industry fears that young people will opt-out of their savings to invest in the LISA, this could prove disastrous.

Lynda Whitney, partner at Aon Hewitt, said: “The new Lifetime ISA may be welcome, but it could well be the Trojan Horse that kills off pensions at a later stage.

“We fear the mixing of shorter term saving for house purchase, with longer term saving for pensions.  Will individuals invest in low risk assets, focusing on protecting the capital value, and so ignore the need to take enough risk to generate returns for a long-term investment like pensions?”

Steven Cameron, Pensions Director at Aegon, added:

“Given the housing challenge young people face today, anything which ‘helps to buy’ will be attractive, but it also creates the real risk that LISA will rarely be used for retirement savings and instead we’ll see accounts depleted as soon as they have built up enough to pay a house deposit.

“If that happens, and contributions to other pensions have ceased, we’ll have a generation even less prepared for retirement, and who may end up reliant on state pensions which of course are paid by the next again generation. That’s doesn’t seem consistent with the ‘next generation’ focus.”

Some commentators have played down the risk, suggesting that the LISA can be used for house saving while young people continue to use auto-enrolment to pay for a pension.

Jamie Smith-Thompson, managing director of Portal Financial said: “I suspect that most people will use the ISA for house deposits, while auto-enrolment will be the main vehicle for retirement savings. Taken together, people have a good opportunity to be in very strong positions when they leave the workforce.”

This may be true, but then we are back to the original problem where young people with limited funds have to pick where they want to put their money – towards saving for a house, or saving for retirement.

Of course, for anyone lucky to have spare money left over after auto-enrolment, this product is ideal. It gives young people an extra incentive to save.

But then – these weren’t really the people we were worried about in the first place – were they?

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