Whatever policymakers think of the word ‘pension’, it is undeniable that the nation needs some form of retirement saving. With the launch of the Lifetime ISA, the Treasury has introduced an appealing way to save for the long term. But in doing so, does it risk undermining the success of auto enrolment?
With the average retirement now stretching well into three decades, and defined benefit provisions a distant memory for virtually everyone outside the public sector, the need for a savings structure that promotes income throughout retirees’ old age has never been greater.
Lifetime ISA – a threat to auto enrolment?
The carefully built consensus around auto enrolment is starting to address this issue. Indeed the Chancellor said in the Budget that he had not taken the consultation on retirement incentives further because of a lack of consensus. Yet at the same time the Government has launched a new long-term savings wrapper, with an incentive to encourage saving to age 60, without consultation.
The potential impact on auto enrolment is unclear but the Work and Pensions Select Committee has re-opened its inquiry into auto enrolment to understand whether it poses a threat.
Research we conducted with young savers revealed nearly a third (30%) of people aged between 18 and 39 plan to save in both a workplace pension and Lifetime ISA when the Lifetime ISA launches. A further 16% say they will continue to save into a workplace pension and not open a Lifetime ISA while 9% will stop saving into a workplace pension and put their savings into a Lifetime ISA.
Of those that plan to open a Lifetime ISA, over a third (38%) plan to use the money saved for their retirement, one in five (21%) plan to use it for buying their first home while 18% say they’ll use it for both.
Crucially, 41 per cent of those surveyed said that if they had the option, they would like to be able to put their employer’s pension contribution into their Lifetime ISA. We do not yet know whether offering a contribution into a Lifetime ISA as an alternative to a pension contribution will constitute an unlawful inducement to opt out of auto enrolment, but employers may wish to offer them the alternative.
Saving in a pension makes sense in numerical terms because of the benefits of tax relief and the employer matching contribution. But we should expect at least some younger savers focusing on property purchase to opt out of auto enrolment in favour of the Lifetime ISA. The media is already awash with ‘which is best?’ analysis, which will have the inevitable consequence of turning at least some young savers against pensions.
Retirement saving policy needs stability – one of the things consumers dislike about pensions is the idea that the Government will change the rules on a whim. Auto enrolment has been boosted by the political consensus it has enjoyed.
The launch of the Lifetime ISA has left employers, advisers, providers and most importantly workers unclear as to what the Government’s long-term savings policy actually is. If the Lifetime ISA is the finished article, then there is a genuine risk of increased opt-outs amongst younger savers understandably more preoccupied with buying a home than retirement saving.
A change in tendency regarding long-term savings
The point of auto enrolment is to overcome the well-known behavioural tendency to put a greater value on something to be consumed nearer in time than something saved for a seemingly far off retirement. The Lifetime ISA on the other hand appeals to this tendency.
Changes made to the system today won’t be felt for 30 or 40 years and therefore long-term, consensus-based thinking is a must. Without this, there is a real danger of an unwanted ripple effect.