The Lifetime Isa will offer people under the age of 40 an alternative pension system. To me that seems just plain crazy. I am very concerned about the destabilising effect an alternative pension system will have on the rollout of automatic enrolment. It seems incredible to me the Government would even consider providing an alternative pension system to so many younger people while the auto-enrolment reforms are under way.
There will surely be a very real chance people under the age of 40 will opt out of auto-enrolled pension scheme membership to save their money in the alternative Lifetime Isa pension system. Because of that the Government should take immediate action and change the rules relating to auto-enrolment and opting out.
At present, if an employee opts out of a pension scheme into which they have been auto enrolled they forgo the pension contribution their employer would have made on their behalf had they remained pension scheme members. That must now be changed.
Once the alternative Lifetime Isa pension becomes available next year it will make sound economic sense for many people under 40 to invest in it to save for the future. It may even be advisable for them to do so. But very few people will be able to afford to save in both their company pension scheme and an alternative Lifetime Isa pension scheme and there are almost certainly going to be many bad decisions taken by people if we are not very careful.
To make this potentially dangerous situation slightly safer for employees, employers, pension providers, Lifetime Isa pension providers and, not least, advisers – the auto-enrolment regulations must be changed to allow employees who opt out of paying into their company pension scheme to retain the right to their employer’s contribution to that workplace pension scheme. That simply has to be done before April next year.
While that would make the overall pension environment slightly safer, it would do nothing to make things simpler. In fact it would do quite the opposite. We seem to be about to take an already highly complex pension system to impenetrable levels of complexity which I am sure we will come to regret.
The auto-enrolment reforms that were well under way before the 2016 Budget were in the process of establishing workplace pension schemes in every company in the land, even the very smallest. Workplace pension schemes with capped charge levels are a good way of ensuring even small pension schemes can be run at an economic level.
I would imagine if the Lifetime Isa pension becomes popular with auto-enrolled employees it would make similar economic sense for grouped Lifetime Isa pension schemes to be made available in the workplace to house the alternative pension contributions for the younger employees who opt out of the workplace pension scheme for some or all of their own contributions, but remain in it for their employer’s contributions.
All this, of course, will eventually need to be allowed for on the pension dashboard. But whether anyone will ever be able to make head or tail of what their dashboard shows is anyone’s guess.
Steve Bee is director at Jargonfree Benefits