Lifetime ISA detrimental to workplace pensions
● Impact of launch needs to be assessed
● LISA at odds with automatic enrolment
● Savers to lose over £45,000 at least
LONDON, 21 March 2016 – The new Lifetime ISA (LISA) could have a detrimental effect on retirement saving in the UK and more research needs to be done to calculate its effect on workplace pensions, according to RetireEasy.co.uk, the free, independent financial planning tool for those in or nearing retirement.
It is calling on the Treasury to launch a consultation before LISAs are introduced next year into whether savers will choose the tax-free availability of a LISA over a workplace pension, even though it could leave them seriously out of pocket.
For example, if savers are enticed into opening a LISA instead of a workplace pension, they will lose out on valuable employers’ contributions over a 30-year period as well as the enhanced returns of a pension plan1, which equates to a loss of £45,000 to their pension fund at the very least (please see example below).
Mark Soper, co-founder of RetireEasy.co.uk, said:
‘Once the gloss fades off this shiny, new product, we will see there is an insidious, popularist element to its launch. Initially a vote winner for the Chancellor, it can only serve to decrease the amount of money savers set aside for retirement.
‘The allure of the LISA’s early access and possible tax free withdrawals may lead to many workers withdrawing from or opting out of their workplace pensions with the associated loss of the employer’s pension contribution. At best, it provides a layer of complexity for an individual to consider before joining a workplace pension – which is counter intuitive to automatic enrolment; at worst, this could prove disastrous in the longer term for a healthy retirement plan.’
The Government contributes the same amount to both LISA and workplace pensions via tax relief.2 However, if the individual is a 40% taxpayer, they will not receive any further top up payment from the Government in a LISA, but will receive additional higher rate tax relief of 20% on the gross contribution paid into a workplace pension under current rules.
Under workplace pension rules, the employer will also add a contribution; for example, if a 30-year-old is on a salary of £20,000 p.a., the employer must add a minimum contribution of £191.76 p.a. immediately, doubling to £383.52 in April 2018 and trebling to £575.28 p.a. in 2019.3
If the 30-year-old chooses a LISA and opts out of a workplace pension, the employer does not need to contribute anything and, over 20 years, the individual will lose £10,546.80 total employer contributions plus investment return.
Over a 37-year investment period from the individual’s age of 30 to a retirement age of 67, this equates to a whopping loss of pension fund of approximately £45,000.4 Using an inflation rate of 2% p.a., this means the individual would lose £22,000 in today’s terms.5 In reality the loss is likely to be a lot more as a result of salary-related increases in employer pension contributions.
These losses are in addition to any withdrawals made prior to retirement age, which will carry a 5% charge and loss of bonus if used for anything other than a first-home purchase.6
Notes to editors:
1 Many savers will opt to keep their ISA in cash over stocks and shares, thereby missing out on the improved investment performance of a pension over a long-term period.
2 For example, if a 30-year-old contributes £600 p.a. to a LISA, the Government will ‘gross up’ this payment to £750. This is exactly the same as the Government does for workplace pensions; if an employee pays in £600, the Government will add £150, so £750 is invested in the pension plan.
3 These figures assume no change in salary and no change in the NIC Lower Earnings Limit.
4 This figure assumes an investment return of 4.0% p.a. throughout and does not include any salary-related adjustments to the employer’s contribution.
5 Or £18,700 after 20% tax on the taxable portion.
6 Savers will need to return the bonus element of the fund plus any interest or growth on it to the Government along with a 5% charge if money is withdrawn for any reason other than home purchase or retirement. However, this may change in future: the Government has said that it will consider allowing savers to keep the full amount in future if funds are withdrawn for anything other than retirement or a home purchase.
For more information please contact:
Alan O’Sullivan – 07872 304639 / firstname.lastname@example.org.
RetireEasy.co.uk is the only free, independent, holistic online tool that gives those in or nearing retirement peace of mind by empowering them to plan for their financial future.
Its online planning service, LifePlan, is a highly interactive, intuitive, flexible and easy-to-use web-based program, which is an entirely safe and secure resource.
RetireEasy.co.uk aids multi-asset financial planning by optimising capital and income, factoring in debt liabilities such as a mortgage, along with a range of assets including property, one or more private retirement plans, investment portfolio and cash.
The business was formed in 2010 by Richard and Naomi Collinson, and Mark Soper.
For more information, visit https://www.retireeasy.co.uk/.