Young savers forfeiting employer contributions for Lifetime ISA

More than a third of younger employees would prefer to save into a Lifetime ISA than a pension, even if it means they would be giving up a potentially valuable contribution from their employer.

Related topics:  Retirement
Rozi Jones
4th October 2016
pension nest egg annuity retirement old people
"It’s crucial that younger employees properly evaluate just what they will be giving up if they do decide to stop saving into their pension to redirect into a LISA."

The Capita research revealed that 34% of employees aged between 16 and 34 said they would rather use an ISA to save for retirement than a pension, with just 15% of young people disagreeing.
            
The Lifetime ISA is planned to be launched in April 2017 for anybody under the age of 40. Individuals can save up to £4,000 a year and receive a further 25% top-up from the Government and the fund can be used either to purchase a first home or for retirement.
 
60% of 16 to 34 year olds believe the LISA will have a positive impact, with just 8% disagreeing. A significant 32% said they didn’t know, suggesting more information and advice is needed.

However if it came down to a straight choice between pension and LISA, most young employees said they would rather stick with a pension. While 38% of 16 to 34 year olds said that if they could access their pension more flexibly (for example to buy first house) they would be willing to give up the pension contribution that their employer pays, 42% said they would not.

The pensions industry has already raised concerns that the product could become a threat to auto-enrolment and even signal "the beginning of the end of traditional pensions"

Former pensions minister, Steve Webb, said: "Just at the point that millions of under forties have started pension saving for the first time, the Chancellor has set up a rival product which risks causing mass confusion. Young savers who opt out of pensions in favour of a lifetime ISA lose the contribution from their employer and the chance to build a tax-free lump sum from a pension pot - how will they know which is right for them? Young workers have had some of the lowest opt-out rates when they have been enrolled into workplace pensions, yet the Chancellor's desire for a shiny new initiative could undermine the huge progress which has just been made in ensuring young workers have savings for retirement.”

The research also found that 49% of employees find pensions-related terminology to be confusing and a barrier to plan effectively for retirement, and 51% don’t know how much they should be realistically saving for retirement. 57% of employees say they would happily see further changes to pension rules if it made pensions easier to understand.
 
Anish Rav, head of DC proposition & strategy at Capita Employee Benefits, commented: “It’s easy to see how LISA could become popular, but it’s crucial that younger employees properly evaluate just what they will be giving up if they do decide to stop saving into their pension to redirect into a LISA.
 
“While the research reveals growing trust in the pensions industry, it is also clear employers need to be doing as much as possible to explain and communicate the options their employees have at their disposal.”

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