The Treasury Committee has called upon the Government to abolish the Lifetime ISA (LISA) stating that it has received strong criticism over its ‘complexity, its perverse incentives, its lack of complementarity with the pensions saving landscape and its apparent lack of popularity with the industry and pension savers’.
Jonathan Watts-Lay, Director, WEALTH at work, comments; “Instead of ditching the LISA completely, thought should be given to making it the key vehicle to help individuals buy their first home.”
He adds; “The LISA is an ideal option for those saving for a deposit on their first home, due to the guaranteed bonus, so I see no reason why it shouldn’t be a great addition to the workplace benefits package.
In fact, what many employees don’t realise is that saving into a LISA can actually help them to save for a deposit faster than using a savings account, and that by getting into the savings habit, it may also actually increase their pension pot.”
To help with this, WEALTH at work has illustrated how this could work in practice in the example below.
The individuals in the example below 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. 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|
By using the LISA, Louise gets the house 2 years earlier and gets a bigger pension pot. 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.
Watts-Lay comments; “We can see from these figures that whilst Sam and Louise have made exactly the same contributions overall, Louise has the double benefit of getting her first home quicker whilst also ending up with a bigger pension but at no extra cost.”
He adds; “But of course, the LISA is only part of the picture. It’s important for employers to think about how they can support employees who all want to save in different ways to help them with their short, medium and long term savings goals. Such variety allows employees to choose a savings method, or a combination of methods, which are the most appropriate for them at a given point in time.
Whether employees decide the LISA or another savings method is right for them, proving support in terms of financial education and guidance is crucial if they are to make the most of the saving options available.”