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‘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.”


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There are 7 comments at the moment, we would love to hear your opinion too.

  1. Grossed up 25% and tax-free withdrawals seems like a good deal to me. This should have been done years ago instead of that ridiculous scheme called personal pensions where life offices took 75% of your money and in return gave you a taxable income.

  2. Well it looks like Osborne has cooked up a way of bringing in Pensions ISA’s through the back door, with a nice healthy upfront bribe to get the young people hooked. It has quite clearly been intentionally engineered to actively encourage basic rate tax payers to invest into this rather than a Workplace Pension scheme. Also the 25% ‘gift’ is essentially the same as the proposal to offer a flat rate of pension contribution relief. Funny that? So it seems he didn’t back off at all, he is just approaching it from a different angle. As the saying (almost) goes, “Beware of Chancellors bearing Gifts!”

  3. AE was always rubbish. What’s the point of having employer contributions as well as the tax relief if all you can get are naff funds and little choice.

    Are we to presume that with this Lifetime ISA those qualifying will have the same freedom of choice as others who will be contributing to the new £20k ISA? If so ditch AE and buy some proper investments.

  4. PS You can still do salary sacrifice for the pension if you are minded, but you can also do a deal with the employer to up your salary in lieu of you contracting out. That is not an employer incentive it is an employee choice. The employer will probably be delighted as he then avoids all the bureaucracy.

  5. It’s a clever move and keeps the plan away from the pension people. It’s obviously better for the basic rate taxpayer than a personal pension – 100% tax-free cash! This will make it easier to abolish higher rate tax reliefs on pension contributions. Can’t see AE continuing.

  6. One concern is why the apparent arbitrary cut off at 40. If it’s a good idea, why prevent those over 40 using this approach to save for retirement… unless this is to establish a market and a level of interest in the proposal?

    Also, why introduce a limit on the value of the house. if you’re a FTB, you’re a FTB. Having cut offs like this create ‘cliff edges’ in market prices (like Satmp Duty used to).

    Is often feels like things are made complicated for the sake of it.

  7. Freddie Findlater 17th March 2016 at 4:42 pm

    £450k…just about enough for a small dustbin in London.

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