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  • March 2016
03

Chancellor introduces 'Lifetime ISA' for young people as alternative to pensions

Open-access content Wednesday 16th March 2016 — updated 5.50pm, Wednesday 29th April 2020

Chancellor George Osborne has announced that adults under the age of 40 will be able to open a ‘Lifetime ISA’ as a flexible saving vehicle.

2


In today's Budget statement, Osborne explained young people found pensions "too complicated and inflexible" and most faced an "agonising choice of either saving to buy a home or saving for their retirement".

The product will be launched on 6 April 2017. The chancellor promised those who open a lifetime ISA could save up to £4,000 each year and would receive a 25% bonus from the UK government on every pound they put in. Contributions can continue to be made with the bonus paid up to the age of 50.

Osborne said: "For every £4 you save, the government will give you £1. So put in £4,000 and the government will give you £1,000. You don't have to choose between saving for your first home or saving for your retirement. With the new Lifetime ISA the government is giving you money to do both."

Fiona Morrison, president of the Institute and Faculty of Actuaries (IFoA), welcomed the focus on encouraging saving, but added this could raise conflict with other pension savings products and boost opt-outs from auto-enrolment pension schemes.

She added: "In the Lifetime ISA, there appears to be no incentive for people to continue saving into it after 50, an age when many have greater discretionary spending.

"As people tend to underestimate how long they will live, this leaves a risk of people not saving enough to fund their retirement and running out of money, thereby leaving them to fall back on the state for support."

David Fairs, chairman of the Association of Consulting Actuaries, agreed the Lifetime ISA could challenge and conflict with other pension savings products and encourage opt-out rates.

Fairs said: "Whilst we support an initiative that looks to boost flexible savings for those aged under 40, it is difficult to see how this will sit comfortably alongside other pension saving schemes and products.  

"We wonder whether this initiative will undermine auto-enrolment and lead to more young people opting-out in favour of a more flexible savings product.  The government may need to consider whether auto-enrolment contributions should be allowed into Lifetime ISAs."

Stewart Hastie, pensions partner at KPMG, described the product as the chancellor's "testing ground for the Pensions ISA", which had been proposed before the Budget.

He said: "It gives the government the option to see how consumers react to the ISA option."

Eleanor Daplyn, partner at Sackers, called the product a "helpful initiative which addresses generational pensions inequality". However, Tamara Calvert, partner at DLA Piper, said many people would be confused with the third savings vehicle. 

"For example, will somebody who has just started saving into a pension understand the pros and cons of moving to a Lifetime ISA?" she said. 

"Communication of the benefits and tax treatment will be key, to make sure people make informed decisions about which savings vehicle is most appropriate for their needs … There is a danger that, faced with a confusing array of options, people may just opt-out entirely."

This article appeared in our March 2016 issue of The Actuary .
Click here to view this issue

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