“LISAs are an interesting addition to the long-term savings market. If they’re run in parallel with pensions they might improve the long term savings position of employees. They should be considered alongside pensions and other long-term savings.
“The key to ensuring people don’t get burned will be making sure they receive appropriate guidance around what might be the best savings options for them, and that the products they invest in represent good value. Employers are best placed to provide that support. Ensuring that the workplace is a key channel for LISAs will mitigate against poor outcomes for individuals.
“A big question remaining over LISAs is will it be possible for pension contributions via auto-enrolment to be invested into LISAs through the workplace. Clearly auto-enrolment has been a great success so far, and while it’s a big step in the right direction, contributing 8% just isn’t going to secure a decent retirement income for most. There is a school of thought that we'll see lots more opt out once contribution increase. Making LISAs available as an alternative might reduce that.
“While participation in pensions is now high, engagement remains low. The good thing about LISAs is they are likely to drive higher levels of engagement with savings than pensions have historically managed. We recently surveyed under 30s. 75% were really attracted to LISA as an attractive savings option and said they’d be likely to increase contributions if they could save towards a home. This is unsurprising. As a nation we love buying bricks and mortar. But the ‘health warnings’ accompanying LISAs do need to be clearly highlighted.
“We agree with Frank Field that there should be a campaign underlining the risks of opting out of your pension scheme in favour of a LISA. While LISAs come with an incentive – in the form of a Government top up, they also come with penalties for early access. Pensions also come with strong incentives to save, in the form of tax relief and employer matching contributions. By giving up pensions you could be giving up another great top up. The best option for an individual will depend on the incentives available to them and the level of income tax they pay – and whether they need flexibility. As ever, with choice comes complexity. People will need guidance to make the right decisions for them.
“In addition to being concerned about people opting out of pension saving, another worry for us is if they invest in a LISA through the retail market and get a poor deal. One of the great things about a pension is employers generally oversee it, making sure staff get a good deal on fees and that underlying investments are appropriate. If people access LISAs through the retail market there will be a governance gap which could mean that they might not be getting a good deal in terms of pricing or they might put their money into investments that are wrong for them.
“For example if you look at the ISA market, 80% is invested in cash rather than stocks and shares. If people sacrifice pension saving in favour of an ISA, and put that money into cash, then we’ll be storing up even greater problems for the future.
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