The Lifetime Savings ISA promises a cash bonus to young savers, which could have a knock-on effect on other forms of saving
April 2016 saw the birth of the Lifetime Savings ISA (LISA), the often controversial love child of defined contribution pensions and the Help to Buy ISA. Now almost a year later, while we are all waiting for LISA to make its first public appearance, suspense, suspicion and calls for some additional ‘safety wheels’ still abound.
However, what will this new member of the savings family do to workplace pension savings? And just because it could distract savers away from their pensions and into this new LISA – will it in fact actually do so?
What is on offer?
Consider a young person saving for a deposit on a house today, as opposed to after April. When the LISA is available, there will be an additional 25% savings in that person’s LISA – the government bonus – extra money almost magically appearing that is not available today.
What will that extra 25% enable that saver to do?
- To save quicker to buy their home, or
- They could reduce their own payment into the LISA to account for the government bonus, so their overall total savings remains the same. This would then give them more cash in hand that they could use to save into a pension. Overall, they are saving the same amount but across both savings vehicles: one for the short term for a house deposit; and the other to build up long-term savings for their retirement.
A long-term issue
In most circumstances it should be possible to look at savings for the short and long term. The LISA, via that government bonus, will give people that bit more room to look to save for their future as well as for now.
But individual employees are unlikely to come to this realisation without help; they will need education and guidance.
A Treasury impact assessment report published in October 2016 estimates that 800,000 savers will opt to save into a LISA by 2021, comprised mostly of people who have never enrolled into a pension.
So the Treasury report seems to be telling us is that LISA will probably have most impact outside of the workplace. But as this new product will be marketed widely to all consumers, not just those without a pension, employees won’t be able to distinguish whether this is something they should do or not.
The impact on pensions
For people who are employed and who are not yet contributing to or optimising their workplace pension, then their pension should be their starting point instead of or at the very least alongside saving into a LISA.
Do we think the introduction of the LISA will cause more people to save for and buy houses after April 2017 than before? The answer is almost certainly no.
If we accept this premise then the question of the LISA and the potential impact on workplace pensions becomes more about pension engagement and education rather than the LISA itself.
How an employer can help
In the recent CIPD Financial Wellbeing in the Workplace research, it is of great concern that 30% of workers seek financial guidance from family and friends. While this is understandable and no doubt well meaning, few are qualified or well informed enough to provide real guidance in respect of personal finance.
This research also shows the huge impact that a lack of financial wellbeing can have on a business performance.
There are a great many unknowns regarding pensions and the LISA: we don’t know what will be announced in the spring statement; we don’t know how many providers will offer a LISA from April 2017; we don’t know whether people will switch pension savings into LISA, and how many.
What we do know is that the introduction of the LISA is the perfect opportunity for employers to get ahead of the pack and educate their staff now before they are bombarded with LISA offers. Pension engagement, improved financial awareness and equipping staff to make well informed and more confident financial decisions will pay dividends, for individuals and business. A little bit of education and well-placed guidance can go a long way and the workplace is a trusted method to reach large numbers from a trusted source.