Louise’s lowdown: Will the Lifetime Isa encourage or distract from pension saving?


On 16 March Chancellor George Osborne delivered his Budget 2016 speech to Parliament. A storm of speculation around pensions tax relief had raged for months before beginning to subside in early March, when word spread that this Budget would not, as many had expected, herald in further radical reform to the pensions tax system.

There had been “no consensus”, said the Chancellor, around potential changes; namely a move to a flat rate of pensions tax relief or to an individual savings account (Isa)-style system that follows a Taxed-Exempt-Exempt model rather than the existing Exempt-Exempt-Taxed model.

Whatever the Chancellor’s reasoning, the pensions tax relief system is to remain in its current form, for the time being at least, providing some respite for employers, savers and industry as they continue to navigate a pensions landscape already much altered by April 2015’s freedoms.

Osborne did, however, unveil a new savings mechanism in his Budget speech: the Lifetime Isa. Designed to encourage younger people to save, individuals will be able to save up to £4,000 a year into a Lifetime Isa and the government will make a 25% contribution. The Lifetime Isa can be opened by those under 40, although individual and government contributions can be made up until the age of 50. Savers will be able to put their savings and government bonus towards the purchase of a first home to a maximum value of £450,000, or withdraw these from the age of 60 for use in retirement. Although savings can be withdrawn for alternative purposes, they would be subject to a 5% charge and would forfeit the government’s 25% contribution.

Some have expressed concern that the introduction of the Lifetime Isa will be to the detriment of pension saving, potentially driving employees to opt out of auto-enrolment or to contribute the bare minimum into their workplace pension scheme. Crucially, the Lifetime Isa will not see savers benefit from employer contributions as they do with workplace pension schemes. Employers may need to widen the scope of their pensions education offering to ensure staff are fully aware of this, while continuing their efforts to increase awareness about the importance of saving adequately for retirement.

Yet, the Lifetime Isa does provide greater choice and a further incentive to save, particularly for those who are in a position to use it as an additional savings vehicle. According to research by Mercer, published in November 2015, a third (33%) of employee respondents are worried about getting on the property ladder and 48% are concerned about saving enough for retirement. Worryingly, the research also found that these concerns are contributing to stress levels (78%), lowering motivation (57%), negatively impacting employees’ energy levels (51%), and affecting their overall health (46%).

Considering the significant impact financial worries can have on employees’ wellbeing and the knock-on effect these can have on a business, it is perhaps no surprise that employers’ financial education programmes are becoming increasingly holistic. Indeed, Nudge Global’s Financial education: the definitive guide 2016 report, published in March 2016, found that 77% of respondents would like to include employees’ personal finances in their financial education offering.

So will the Lifetime Isa go some way to alleviating financial concerns, by encouraging employees to save and providing another way in which they can do so? Will it ultimately detract from pension saving or will it complement it? Or will it, as some have speculated, serve as a bridge to an Isa-style tax system for pensions? Only time (and perhaps the next Budget) will tell.