Understanding the Lifetime ISA and Industry Recommendations for Government

The government recently introduced the Lifetime Individual Savings Account (LISA). At a recent mallowstreet Collaboration Workshop, we examined the LISA in detail, identified the pros and cons, and also considered what more radical approaches / policies the Treasury and Government should consider to help increase, build and support a Savings Culture in the UK.

Question: What is your reaction to the introduction of the LISA, and what are the benefits and drawback?

Benefits

• There was general agreement that the LISA is potentially more attractive (due to flexibility) for younger individuals than a pension that locks away money until the age of 55.

• Flexibility is very appealing, especially to support the purchase of a first home.

• Instilling a savings culture today (for either a house or a pension) will help reduce stress and strain on government finances in the long term, particularly the state pension.

Drawbacks

• Stable Policy: There is concern about the stability of future government policy. Can government be trusted to not interfere in the future, especially on tax structure and contribution rates? There was widespread agreement that the government is meddling too much with the savings system.

• Flexibility: Government and the Regulator should allow for more flexibility with existing Defined Benefit and Defined Contributions in order to allow for example, members to make withdrawals before retirement for specific ‘life events’, including: the purchase of a house, school fees, financial hardship, repayment of student debt, etc.

• Product Structure: The question was raised, is this product right for everyone? For example, what about those who are older than 40, and how do you encourage younger members of society to save when the investment returns on money put aside early in life can make up a significant amount of overall total savings by retirement / end of life?

• Future Pensions Contributions: Will the introduction of the LISA divert savings from pensions contributions by younger members of society who have competing financial priorities (e.g. repaying student debt and saving for a house deposit)?

• Impact on Autoenrollment: Concern was expressed that the introduction of the LISA will deter individuals from increasing contributions in future years as auto-escalation comes into effect under autoenrollment

• Financial Literacy: There is a concern around how people will invest the money in these accounts. For example, if investment is in stocks and shares, do individuals have enough education to make sound investment decisions, or should the products (and those providers offering products) be restricted and more heavily regulated?

What are the recommendations you would give to Treasury to help solve the Savings Challenge?

• Existing Product Consolidation: Consider merging LISA and ISA, provide a small number of funds on a platform to make investment decisions less complex for the individual, and commission research (behaviour economics focused) to gain an understanding of language to be used to encourage people to save. It was also suggested to scrap the Junior ISA and lower the age limit for the LISA.

• Contribution Tax Structure: It was suggested that the government take an even more radical step, by taking contributions from gross pay instead of net pay.

• Increase Contribution Levels: Increase the level of auto-escalation in autoenrollment to increase the national savings rate, because at current contribution levels, most individuals will end up in poverty, and not with the retirement they have envisioned.

• Increased Flexibility: Allow individuals more flexibility on withdrawals from existing DB and DC arrangements to support the purchase of a home.

• Improved Delivery Infrastructure: Facilitate ISA / LISA contributions through payroll or include as part of an overall benefits package.

• Flexibility: Allow people to withdraw on a series of anniversaries (e.g. 10 year, 20 year) thereby simultaneously providing flexibility whilst instilling the importance of a savings culture. Allow people a 20 year window (starting at any age) to contribute to a LISA (or similarly structured product).

• Education: Add compulsory financial education into the national curriculum at a much younger age. Also legislate for better education once reaching employment on the benefits of savings, defined contribution schemes. Looking at the USA as an example, employers do this very well; what can we learn from their experience?

• Compulsion: Consider making participation compulsory for defined contribution/ or simply having compulsion around savings.

I'd be interested to hear other suggestions and comments from the community.

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