Lifetime ISA: the younger generation’s retirement?

18th May 2016

Jonathan Watts-Lay, Director, WEALTH at work, joined a panel of experts to discuss the Budget 2016 and the new pension freedoms.

When discussing the introduction of the Lifetime ISA (LISA) and the impact it could have on the younger generation, Watts-Lay comments; “Young people need to save for purposes other than a pension. If you think of a young person who plans to save £300 a month, a sensible recommendation would be to put, say, £100 in a cash deposit, £100 in a mid-term savings plan such as an ISA and £100 in a long term plan or pension. A lot of people do have savings accounts for funding a house purchase and you could argue that this Budget is great news for them.”

“However, one question is whether or not the LISA and pension should be separate or part of a combined facility. I do not think we should overlook the possibility that the new flexibility could in fact encourage saving.”

He continued “Young people like the concept (of LISA) and I wonder whether it is very different from the current practice where an employer offers a range of benefits as a percentage of salary. Employees often already have a whole list of benefits they can choose from.”

The panel went on to discuss the relationship employers have with Defined Contribution (DC) schemes, Watts-Lay comments; “It is interesting that employers were reluctant to even talk about DC for years, as it was seen as the poor relation to DB, but now more people are enrolled into a DC plan, there is greater discussion around it, such as the level of matched contributions and financial education, as employers want to ensure employees can ultimately afford to retire.”

When discussing the idea of a model retirement process, Watts-Lay said; “the pendulum is swinging back the other way. Before Freedom and Choice, employers were by and large happy to do nothing. But  doing nothing is seen as too risky. The Pensions Regulator has been saying for years that employers/trustees should have a model retirement process in place.”

He continued “Up to 70% of employees who attend our retirement planning programme subsequently say they need advice. We know historically from when most people only had the choice of a type of annuity that people make bad decisions on their own. They don’t know what they don’t know. Large employers in particular do want their employees to be able to retire.”

The concept of retirement for all organisations ranging from large FTSE companies to SME’s was discussed by the panel with Watts-Lay adding “We are testing the market to see if small and medium size enterprises are willing to pay to send their employees on a retirement seminar. They may, for example, only have one employee facing retirement in a given year, but wish to help that individual to understand the options available.”

When asked how Freedom and Choice is working one year on Watts-Lay believes “we need to be talking more about retirement income services. If you phone a product provider, they will only talk about their single product, but people need a service proposition to help across their finances. People do not understand even basic things such as where tax might be paid. They will take money out of a pension and pay income tax on it even if they have an ISA where they could limit their tax bill by drawing money from both pension and ISA.”

When it comes to guidance and advice Watts-Lay believes financial education should be on the forefront for all employers, he comments “I was looking at research from the Pensions and Lifetime Savings Association on people who can access their pensions, which suggested that 56% do not plan to pay for regulated financial advice, 55% do not plan to contact their employer and 47% do not plan to contact Pension Wise. Why is this? It goes back to that old challenge that people don’t know what they don’t know – so it’s hard to get bums on seats.”