The new Lifetime ISA: is it worth considering? | KPMG | UK

The new Lifetime ISA: is it worth considering?

The new Lifetime ISA: is it worth considering?

We take a look at what it means for employees and employers.

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Ahead of the 2016 Budget, major reforms to the pension system were widely expected. In the event, these failed to materialise. Instead, the chancellor announced the introduction of the new Lifetime ISA (LISA) – an alternative or a complement to existing pensions rather than a replacement.

The arrival of LISA is part of the trend that has seen the government steadily introduce more freedom and choice into the pension system. Pensions, once seen as the key financial planning product for retirement, will increasingly come to be viewed as part of a broader range of lifetime financial planning arrangements.

Good for your employees?

For employers, the new LISA has the potential to become part of a modern benefits package that reflects the evolving nature of savings and pensions. And a workplace LISA could be attractive to many employees under age 40 at the time LISA is launched. Here’s why:

  • LISAs – available from April 2017 – have the potential to offer eligible individual savers a better return on their employee contributions than they might expect from a conventional workplace pension. As a result of the 25% bonus on up to £4,000 they put into a LISA each year, they could receive contributions worth up to 15% more (after tax) by the time they reach retirement. Employers can still pay any matching contribution into pension so that the employee doesn't give up this valuable benefit.
  • LISAs offer more flexibility than current pension schemes, where funds are tied up until individuals reach the age of 55. By contrast, savers into a LISA can withdraw funds at any age to help towards the purchase of their first house, or for any purpose after age 60, without paying tax. They can also access funds before age 60 (albeit with a penalty and loss of the bonuses).
  • A workplace LISA, with contributions deducted automatically through payroll should reduce the level of management charges they would have otherwise incurred from establishing their own LISA, plus it gives employees an easy way to save for the future and to take up the 25% bonus on contributions offered by the government.
  • Employees will need better support to make the right financial choices in this more complex savings landscape. A workplace LISA combined with financial advice subsidised by government (an increase in the tax-free allowance for financial advice was announced in the 2016 Budget) could be the package for many.

Good for your business?

With government finances under pressure, particularly in light of Brexit, further changes to the pensions tax regime seem almost inevitable. As tax advantages are eroded, businesses will need to find alternatives to workplace pensions to help employees as they try to build up meaningful long-term savings.

Offering a workplace LISA alongside an existing workplace pension (and potentially a Corporate ISA for the over forties) offers a way round this for some employees. It can help you increase the value of employees’ savings without necessarily increasing your own costs. Under this approach, employees could choose the proportion of savings that go into pension and/or LISA. Excess contributions and employer matching contributions could still be paid into workplace pensions.

A package incorporating access to a workplace LISA can also help build your brand as a desirable employer and, in particular, attract and retain sought-after millennials. This generation is struggling more than any before with the choice between saving for a first house and saving for a pension. A package incorporating a workplace LISA can offer valuable flexibility.

LISAs also have a role to play as part of broader efforts to help employees become financially resilient. A survey1 by financial wellness provider, Neyber, showed that 55% of employees say being under financial pressure affects their behaviour and ability to perform their job. Promoting employees’ financial health (in the same way that leading employers promote employees’ physical and mental health) could deliver important benefits in terms of improved productivity and engagement.

Analysis we carried out recently for a FTSE100 client indicated that around 25% of their DC employees under age 40 could be better off at retirement with a dual pension/LISA offering and a further 70% could have broadly similar level of retirement benefits but with the added flexibility that LISA brings.

Will you be among the first movers?

Forward-thinking employers will be the first to incorporate workplace LISAs into their benefits package, but it may be a while before they become standard. Our survey of over 100 pensions and benefits professionals in June, for example, indicated that around one-third of employers are considering introducing a LISA for their employees. A further third plan to communicate information about the new product, but not offer it. Remember from April 2017, if employees don’t start a LISA before they turn age 40, then they will not be eligible for the 25% LISA bonus in future years under the rules initially set out by government.

If you are interested in using LISAs to modernise your benefits package and increase its value for employees, here are some key questions to ask:

Is a workplace LISA right for our workforce?

Given the amount your employees earn and the rate they pay tax at, how many would be interested in saving with a workplace LISA?

How do we structure a dual pension/LISA offering?

How can you continue to comply with auto-enrolment for pensions whilst making it easy for your employees to understand their choices and to see the value in a dual pension/LISA offer?

 

References

1. "The DNA of Financial Wellbeing Summary Report - May 2016", Neyber

 

 

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