1st March 2017
By Jonathan Watts-Lay, Director, WEALTH at work
The new Lifetime ISA (LISA) is due to be available from April 2017.
There are concerns that it will compete with workplace pensions and undermine auto-enrolments success in encouraging people to save, but will this really be the case?
Pensions should, of course, remain an integral part of saving. Yet other choices such as the LISA should not be seen as a threat, as they may in fact encourage employees to develop a savings habit, which ultimately could benefit pension savings. After all, the LISA is a great option for those who want to save for a deposit on their first home due to the guaranteed bonus.
A relevant and well communicated benefits package, which the Lifetime ISA can become a part of, not only helps recruit the most talented individuals but it can also help retain a happy and committed workforce. After all, debt and money worries can be linked with lower productivity and staff absences.
Our calculations below demonstrate that the 25% guaranteed bonus which comes when saving into a LISA, means that it could actually help employees to save for their first mortgage deposit much quicker than if they save into a high street savings account; and that by achieving this earlier, they may actually increase the size of their pension pot.
In our examples; we illustrate two individuals who are both age 25 and wanting to save for their first home. They both want to focus on saving for their home, whilst still saving something into their pension. The calculations assume that both are earning £26,500 p.a., with an annual salary increase of 2.5%, and are aiming to save a 10% deposit to buy a house worth £194,224 (average price for first time buyer)*. The calculations also assume saving rates returns of 0.5% for 10 years, investment returns of 5%, a 9% pension contribution (3% employee contribution with 6% employer contribution with non-salary sacrifice).
Sam – chooses to save £2,000 a year into his savings account at 0.5% interest. It takes 10 years for Sam to save his £20k deposit (£20,558). Meanwhile he is also saving 9% through auto enrolment into his pension each year. In 10 years, his pension will grow to £34,940. Once he has saved his deposit, if he starts saving the £2,000 into his pension instead, based on the assumptions outlined above, he would have £415,042 in his pension by age 60.
Louise – chooses to save £2,000 a year into her LISA. With the annual £500 government contribution added into the LISA, and 0.5% interest, it takes only 8 years for Louise to save her £20k deposit (£20,455k). This is two years less than Sam. Meanwhile she is also saving 9% through auto enrolment into her pension each year. Following her house-buy, she then starts saving the £2,000 she was saving into her LISA, into her pension instead. This amounts to an extra £5,381 in her pension by year 10 in just 2 years.
If Louise continues to save like this until she is age 60, she will have an estimated pension pot of £433,265. This is £18,223 more than Sam because she started with a LISA initially.
These figures are highlighted in the table below;
|Time it takes to get house deposit||10 years||8 years|
|Pension pot after 10 years||£34,940||£40,321|
|Pension pot after 35 years||£415,042||£433,265|
We can see from these figures that whilst Sam and Louise have made exactly the same contributions overall, by using the LISA, Louise gets the house 2 years earlier and gets a bigger pension pot at no extra cost. If individuals also find themselves paying less on their mortgage than what they were when renting property, this could then free up even more money up to go into the pension, resulting in even more in their pension pot.
We hope that these calculations, whilst obviously simplified to demonstrate the point, show that saving into a LISA can actually help employees to save for a deposit faster than using a savings account, and that by getting them into the savings habit; it may also actually increase their pension pot.
After all, it is in the best interest of the employer to recognise the commercial cost to employees having financial worries and why a good financial wellbeing strategy is in a company’s best interest.
For more information, please contact us.
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