Potential pitfalls of the Lifetime Isa – Royal London
By Kirsten Hastings, 14 Jun 16
To be introduced in the UK in April 2017, the Lifetime Isa (Lisa) is intended to incentivise people to save for their first home, their retirement, or both. But research published by the independent Pensions Policy Institute (PPI), sponsored by Royal London, compares the tax-free savings scheme with its international counterparts and highlights some challenges that may arise.
In the global context, PPI and Royal London have identified some implications and key lessons for the UK.
The Lisa is a separate product from a workplace pension;
- In theory it is conceivable that a workplace pension and a Lisa could be combined to allow people to contribute to a pension and to a Lisa at the same time. However, this policy would require support from employers who are responsible for over-seeing employee contributions into workplace pensions.
- It would also potentially require people to make contributions over the normal minimum required levels of 8% of band earnings (£5,824— £42,385) 2016/17 under automatic enrolment in order to ensure they still had sufficient savings to support needs in retirement.
Employers are not required to contribute to an employee’s Lisa savings;
- The Lisa scheme differs from the workplace pension in that it is TEE, but also because employees who take out a Lisa are not guaranteed to receive an employer contribution, while most members of workplace pension schemes are.
- Lisa members are eligible for a matching government bonus of 25% of contributions (up to £1,000 per year). Members of UK workplace pension schemes are eligible for tax relief on pension contributions at their marginal rate (though tapered for higher earners).
- In the countries examined by PPI, people are able to use their workplace pension schemes alongside an early access facility. Therefore, they are not required to potentially give up an employer contribution or change tax systems in order to use early access alongside retirement saving. It is possible, however, that some employers will offer contributions into a Lisa in future.
Other early access schemes have a repayment feature;
- Early access schemes in the US, Canada, and to some extent Singapore, require repayment of funds within a certain time period or after particular events. This feature mitigates some of the reduction that withdrawing funds early will have on pension savings, though it cannot mitigate entirely for the loss of returns on compound interest.
- Because the Lisa scheme does not have a repayment facility, funds lost through early withdrawal are lost entirely, alongside any future returns on compound interests generated on that portion of funds. Therefore, early withdrawal may more adversely affect the pot sizes of those using a Lisa to save for retirement than those who repay their funds over time into their pension schemes.
Tags: Australia | Canada | New Zealand | Pension | Royal London | Singapore | Steve Webb | US
