The benefits of LISA

Now the latest savings vehicle is here, should it form part of your benefits package?

The benefits of LISA
LISAs: the ideal solution for the under-40s torn between saving for a home of their own, and saving for a pension?

In brief:

  • Now the LISA is part of the savings landscape, employers can decide whether to include it in their benefits package.
  • Not everyone is convinced that these are a good idea for younger savers as it may prove a distraction from pensions.
  • It could be worth offering financial information or advice to ensure younger employees make an informed decision.
  • With this in place, LISAs could become an attractive part of a tailored benefits package.

The savings and investment world is celebrating a new arrival now the LISA has officially joined the savings and investments family. Since 6th April, investors have been able to put their money into a brand-new tax efficient savings vehicle, known as the Lifetime ISA, or LISA. It was unveiled by George Osborne last year as the ideal solution for the under-40s torn between saving for a home of their own, and saving for a pension.

LISAs are available as a corporate product, offering young people a whole new way to save for the future in the workplace. The question is whether it should have a place in the benefits package.

Savers’ priorities

Michael Johnson, a research fellow at the Centre for Policy Studies, who is widely credited as the architect of the LISA, highlighted that younger people are not saving for a pension. They are allocating all their spare cash to save for a property deposit, so they have nothing left for retirement planning. The idea of combining the two goals in one product enables them to do both concurrently and tax-efficiently. As Osborne said when he announced the LISA, in his Budget back in 2016: “You don't have to choose between saving for a home and saving for a pension. The Government is giving you money to pay for both."

The vehicle is expected to be enormously popular. The Treasury estimates that 200,000 new LISA accounts will be opened every year for the next four years, while Aon Hewitt is predicting an even higher level of success. It suggests that in the first year alone there will be 2.25 million accounts opened.

Will your company embrace LISAs?

Employers will have the opportunity to be part of that trend, with the launch of their own corporate LISA. It could slot into a package of potential savings options – alongside a pension, share scheme, and a corporate ISA. They could even offer a tranche of reward that could be diverted towards the most appropriate savings vehicle for each individual, providing flexibility for people to tailor the package to their own needs.

In a survey by Close Brothers and Employee Benefits, while just 7% of employers have an active plan to introduce a LISA, only a third of employers have made the conscious decision not to do so (42% are undecided). Those with plans for a scheme didn’t see it as replacing any part of the package: every one of them said they thought employees would use it in addition to the existing pension scheme.

There are therefore advantages to including a LISA as part of the benefits package. However, before any employer takes this step, it’s vital that they appreciate that this savings vehicle is not without its flaws.

Points to consider

There have been some questions over the product itself. Saving for the relatively short term, for a house deposit, means taking very little risk, and in many cases means putting your money into a cash-based LISA. Saving for the long term, such as for retirement, meanwhile, should open up considerations of far more types of investment, including stocks and shares. Both are available within the same LISA, but there’s a question mark over whether employees will take the opportunity to split it in this way. It means they could have all their savings in cash for the first decade, which risks missing out on vital potential growth in an environment of low interest rates and high inflation.

Critics of the product also point out that towards the end of the LISA’s lifespan it becomes decidedly less rewarding. The government will stop adding the 25% bonus once the saver reaches the age of 50 – but the money will still be tied up until they reach the age of 60. 

Will employees split or shift savings?

Employers introducing a LISA also need to consider the possibility that some employees who are currently saving into a workplace pension will shift to saving into a LISA. Research by the Association of Consulting Actuaries found that 52% of employers think the LISA will discourage younger employees from saving into a workplace pension.

This may suit their immediate savings priorities, but they need to understand that it comes with a cost.

If employees opt for the LISA instead of the pension, they are giving up potential employer contributions, which in many cases makes the workplace pension a far more lucrative place to save than the LISA. A worker who saves £1 into a LISA may well get a 25p top-up from the government, but that’s a drop in the ocean compared to the £1 top up available from an employer prepared to match employee contributions. They also need to appreciate that the 25% bonus that the government is talking about, is exactly the same as the 20% tax relief available within a pension.

Ros Altmann, the former pensions minister, is so concerned about the flaws in the LISA, that she has been an outspoken critic from the outset. She argues that if young people are not switched onto pensions, then the government’s answer should not to be to bring in a new product to compete with them – but to find ways of getting young people to engage with pensions.

Employers left to engage young people with pensions

The fact that the government has not chosen to do this means it has effectively passed the responsibility of engaging young people in pensions to employers. They cannot simply accept that young people don’t find pensions exciting, and offer up an alternative, because that raises the risk that younger employees will make the wrong decision.

Instead employers must ensure that all employees engage with pensions as well as the LISA, in order to ensure they make an informed decision about which savings vehicles are most appropriate.

It strengthens the argument that when young people first join the workforce, they ought to be offered access to financial information and education, or advice. This is not a time in their life when people tend to turn to professional financial advice, but the decisions they make at this point could have long-term implications. It may therefore be worth employers investing to make this advice attractive, whether that’s by subsidising sessions, or paying incentives to younger employees to attend workshops and seminars.

Is it a worthwhile addition?

It’s an irony that’s not lost on benefits professionals that a government initiative designed to ease a burden on young people should end up adding to the burden shouldered by employers.

However, with the right education and communications underpinning the LISA, adding it to the package could be a win-win. Those who choose to invest in a LISA will appreciate the fact they have more choice and more ability to tailor the benefits package to their needs. Meanwhile, those who choose to focus on the pension will have a better understanding of the value of their pension benefits.

Perhaps the arrival of the LISA could be something for benefits professionals to celebrate after all.

What is a LISA?

The Lifetime ISA (LISA) is designed to solve two savings challenges. It is meant to help younger people (under the age of 40) save tax-efficiently for a deposit on their first home. The vehicle can also be used to save for retirement, and can be accessed once you hit the age of 60.

The idea is that young people can choose to target either savings goal – or both at the same time – and that any money taken out of the LISA is tax free.

It has an annual savings limit of £4,000, and as well as any interest it earns or investment gains it makes, it will be topped up with a government bonus each year of 25% of your contributions in that year. The bonus will be paid annually in the first year and then monthly thereafter – until you reach the age of 50.

If you choose to take the money out for any reason other than a first house purchase or after the age of 60, you will lose the government bonus - plus any interest or growth on previous bonuses. You will also have to pay a 5% charge to access the cash.  

Saturday 19 August 2017
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