‘Huge risk’ Lifetime Isa will damage auto-enrolment

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There is a “huge risk” George Osborne’s Lifetime Isa will undermine auto-enrolment by encouraging young savers to opt-out and save in the early access product instead, providers are warning.

The new product – unveiled in this week’s Budget – is set to cost the Treasury £2bn by 2020/2021.

However, there are fears auto-enrolment’s low opt-out rates will skyrocket as a result.

The People’s Pension director of policy Darren Philp warns: “My worry is the impacts that it will have on auto-enrolment and that these may not have been completely thought through. Auto-enrolment relies on inertia and has so far been popular. Opt outs are universally low.

“We already know that people are stretched financially, and the attraction of the flexibility offered by a Lifetime Isa may make it an ‘either/or’ for savers.”

Aegon pensions director Steven Cameron says: “There is a huge risk that the Lifetime Isa will encourage some under-40s to turn down the opportunity to be auto-enrolled into a workplace pension, even though that comes not only with the equivalent 25 per cent Government bonus on personal contributions, but also with an extremely valuable employer contribution.

“Employers will not be allowed to pay into Lifetime Isa. The self-employed don’t benefit from an employer contribution so this may suit them, and encourage earlier engagement with retirement savings.”

The Lifetime Isa will be launched in April 2017 and allow people under 40 to save up to £4,000 a year with a 25 per cent top-up from the Government. Funds can be accessed early to purchase first properties or at 60 for retirement.

Early access is possible but will see savers hit with a 5 per cent charge and the loss of the Government bonus. The Treasury is consulting on extending early access rules to include other one-off events.

Wingate Financial Planning director Alistair Cunningham says: “Financially it would not make sense to opt-out of a workplace pension in favour of the lifetime Isa.

“Contributions to a workplace pension have both tax relief and a matched employer contribution, so £80 in a saver’s pocket becomes around £200 in the pension. Even taking into account it will become taxed on withdrawal, it’s like a net final amount of £170 will be achieved; an uplift of over 100 per cent.

“The uplift of the Lifetime ISA is significantly lower, but given its accessibility will provide a psychological benefit. From an obvious and pure practical perspective, you cannot use a workplace pension to fund a house deposit under the age of 55, and this will be the critical factor for most.”