By Fiona Tait, Pensions Specialist
Since the announcement in March, the Lifetime ISA (LISA) has attracted controversy. Heralded as a saviour for the self-employed and the young wanting to get on the housing ladder, the new LISA risks adding confusion for savers trying to fully understand the benefits of new workplace pension savings through auto-enrolment.
To better understand how the LISA could work with the current UK pensions system, Royal London sponsored independent research by the Pensions Policy Institute (PPI) to examine the international evidence of how early access savings schemes worked in other countries.
The PPI research examined evidence from five countries – the US, Canada, Australia, New Zealand and Singapore – and compared similar propositions in those countries to the proposed LISA available in the UK from April 2017.
Royal London fed into the research through a panel debate which included representatives from the Treasury, DWP, ABI and Personal Finance Society, among others, which helped inform the final research Briefing Note,‘Lifetime ISAs – international evidence’.
The findings raised a number of key issues about the impact of the LISA on long-term savings in the UK that will need to be addressed before they are launched.
- First, in all of the countries surveyed, early access schemes were integrated into the wider pensions system. Without the need to select a separate product for early access saving, this means that savers do not miss out on valuable employer contributions, the loss of which PPI calculated could reduce LISA savers' pot sizes by up to a third at retirement. This integration extends to being able to secure an income in retirement, the mechanics of which for prospective LISA savers is still not clear.
- Early access has affected the investment attitudes of long-term international savers. Evidence from the US and New Zealand shows that savers are more conservative, investing in lower-risk, lower-return assets that are highly liquid. Given that over 80 per cent of ISAs are currently held in cash – a trend particularly pronounced among young savers – it is likely that LISA savers will follow a similarly risk-averse strategy. This is potentially not the best investment strategy for long-term pension saving.
- One of the stark differences between a LISA and international early access long-term savings regimes is the treatment of first home purchase. Just 1.8 per cent of the 2.5 million New Zealanders using the ‘KiwiSaver’ scheme had withdrawn money for a first home. In Singapore, funds withdrawn to purchase a home must be repaid with interest when the property is sold to mitigate loss of funds.
- There are also tax restrictions in other countries to encourage phased withdrawals. There is no proposal yet on whether the funds accessed from LISA will require repayment or restrictions on withdrawals to ensure savings are not depleted too early.
- One of the arguments in favour of LISAs is that they will allow savers to withdraw their money free of any tax charges, if they meet the terms outlined. In Australia, where withdrawals are currently tax-free on Superannuation policies, the most recent Australian budget proposed a retrospective tax of 15 per cent on withdrawals of above A$1.6m. This is a high amount but PPIs flag that this is a way for governments to limit the tax-free savings available and increase revenue. This questions whether LISAs will always be TEE in the long term.
- LISAs are not framed as workplace pensions and so will not be regulated by The Pensions Regulator. This means that LISA savers are unlikely to benefit from a charge cap, which is currently set at 0.75 per cent, or the provision of free guidance. This could have a significant impact for long-term savings. PPI estimated that if Lifetime ISA funds were charged at 1-1.5 per cent, they could erode the value of a savings pot by 13 per cent by retirement.
- In other countries, early access is monitored by a combination of providers, employers and government. If LISA providers are responsible for managing early access this will increase the administrative burden, resulting in higher charges for LISA savers.
For more information: The Pensions Policy Institute (PPI) is an educational research charity, which provides non-political, independent comment and analysis on policy on pensions and retirement income provision in the UK. Its aim is to improve the information and understanding about pensions policy and retirement income provision through research and analysis, discussion and publication. Further information on the PPI is available on its website: www.pensionspolicyinstitute.org.uk.
The Pensions Policy Institute’s previous briefing note on the LISA, ‘Lifetime ISAs: pension complement or rival’.