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Will the new Lifetime ISA impact pensions as much as initially feared?

24 March 2016

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During last week's budget the Lifetime ISA (LISA) was announced and the focus turned to the future of pensions.

In the Budget last week, Chancellor George Osborne kept his word and didn't tweak the pension system itself but instead introduced competition.

The ISA limit was increased to GBP 20,000 and the Lifetime ISA was introduced.

What is it?

The Lisa is for those aged 18 to 40 and has been designed as a long term savings account. Individuals will be able to save up to GBP 4,000 a year in the new ISA and the government will top it up with a 25% bonus, meaning for every GBP 4 saved the government gives you GBP 1.

Phil Wadsworth, chief actuary at JLT Employee Benefits suggest the benefits and incentives are attractive and getting 'one pound for every four is a straightforward incentive to save.'

'Coincidentally, it is the equivalent of pension tax relief for a basic rate tax payer. The fact that Lifetime ISAs are much more flexible means younger people will likely find it more attractive than pension savings.'

Confusion

With more incentives to save for homes and retirement being thrown at young people, there are more decisions to make on where to put savings pots.

Steve Webb, former pensions minister, Money Observer columnist and director of policy at Royal London says: 'Just at the point that millions of under-40s have started pension saving for the first time, the chancellor has set up a rival product which risks causing mass confusion.'

Webb addresses the clash between the Lifetime ISA and workplace pension auto-enrolment: 'Young workers have had some of the lowest opt-out rates when they have been enrolled into workplace pensions, yet the chancellor's desire for a shiny new initiative could undermine the huge progress which has just been made in ensuring young workers have savings for retirement.'

'We also wonder whether the Lifetime ISA will lead more people to direct savings towards a property, leaving less money for pension savings. So, as with all investments, savers should read the small print.

Adrian Walker retirement planning expert at Old Mutual Wealth argues that 'The Lifetime ISA is a gimmick that will only appeal to younger savers looking for help getting on the housing ladder.'

He believes that only very few people will use a Lifetime ISA to save for old age, and that pensions are still the best retirement savings vehicle.

'Not competition for pensions'

'With a higher minimum age and lower annual contribution limit, the lifetime ISA is not a competition for pensions, so people do not need to decide between the two.'

Jamie Smith-Thompson, managing director of Portal Financial, believes that savers needn't choose a pension or a LISA but they will benefit from both. Opting to use the LISA for gaining a foot on the housing ladder and keeping a pension for later in life.

Taken together, people have a good opportunity to be in very strong positions when they leave the workforce.'

Richard Parkin, head of pensions at Fidelity International says,'These changes will be good for people who are lucky to have additional funds that they wish to save outside of auto-enrolment or who want to have a boost to their housing fund.'

First published 24.03.2016

ceri.pugh@wilmingtonplc.com