2017 will see the introduction of the Lifetime ISA, George Osborne's attempt to help “young people” save for their first home as well as retirement.
I’m proud to say that last year I managed to graduate from generation 'rent' and buy my own home. However, I’m more embarrassed to admit that despite working in the pensions industry, I didn't engage properly with my pension much before then. It's a very common mind-set among my friends and peers to focus on the here and now before looking further ahead. Perhaps unsurprising when, according to research by Nationwide (Nationwide index, 'First time buyer house price to earnings ratio') the ratio of average house prices to earnings for first time buyers was 5.3 in the last quarter of 2016 and when private landlords can demand a 10% increase in rent after one year of renting (which happened to me a few years ago).
In 2017, we will see the introduction of the Lifetime ISA, George Osborne's attempt to help “young people” save for their first home, which has come a little late for me. But looking forward to 2027, the Lifetime ISA's 10th birthday, I wonder: if those years had been my generation rent years instead, would the Lifetime ISA have helped? And would I, and others in similar positions, be any better off in terms of retirement savings?
I didn’t save for my house deposit through a Help-to-Buy ISA, despite it seeming very similar in features to the Lifetime ISA for house purchases. This was mainly driven by the fact that the funds could not be used for a deposit on exchange of contracts, which is what I was saving for. It also didn’t help that my circumstances meant I was buying a house in an expensive region outside of London (where the Help-to-Buy ISA has a more restrictive limit on the price of the house that can be bought). I’m glad that the Government has confirmed that both of these points have been addressed in the design of the Lifetime ISA.
One of the main ways that I saved was using a standing order into a savings account straight after payday. Saving £300 per month gave me £3,600 each year, plus a small amount of interest. Doing this over ten years gives total savings of nearly £39,000, which would be enough for a 10% deposit on a small terraced house near where I am in the home counties (alternatively a modest flat in London or a larger house depending on which part of the country you are in).
The Lifetime ISA pays a 25% top up on contributions up to £4,000 per year. If this had been available to me, I would have received this on the whole amount of my savings. It might even have been a strong push to try to save that extra £400 per year into the Lifetime ISA in order to maximise the amount of top up.
Saving the same amount into a Lifetime ISA would have reached my deposit goal around 2 years earlier, giving me 2 years of post-house purchase savings to redirect towards other things like paying down my mortgage or pensions savings. Also, buying a house earlier might have given me the benefit of a couple of years extra capital growth, given house prices have continued to rise.
What would have been even better is if my deposit savings had been invested into something with a higher return than an easy access bank account. Even an extra 2% interest each year would have generated nearly £3,000 of additional savings over the 8 years. However, while savers will be able to invest in a wide range of fund types within the Lifetime ISA, I don't think many first time investors feel they have the skills or knowledge to invest in much beyond the safety and security of cash, without some form of independent financial education or support.
The Lifetime ISA would have undoubtedly helped me reach my deposit goal sooner and more easily, making more money available for possibly putting into long term savings. However, there remain two key dilemmas for individuals in making the decisions around pensions and property.
1. Retirement saving or house deposit?
The first dilemma for someone saving for a deposit is whether it's worth also saving for retirement at the same time, if it’s even affordable to do so. On the one hand, saving only for a deposit would get them there quicker. Coupled with the pressure of rising house prices and rents, that is a strong advantage. But only saving for a deposit would mean the individual would potentially miss out on their employer’s matched contributions. (Employers currently have to pay a minimum of 1% of qualifying earnings thanks to auto-enrolment and many pay more than this if employees pay more).
The Lifetime ISA on its own doesn't solve this problem, but employers could make the Lifetime ISA part of their pensions and savings offerings so that individuals can still benefit from the matched contribution, as Stewart Hastie, Partner at KPMG in the UK, discussed in his recent article.
2. Mortgage paydown or pension?
The second dilemma is now I've bought my house, how should I save for my pension? The Lifetime ISA is an addition to an already complex landscape. On one hand, the chief economist of the Bank of England, Andy Haldane, says property is "almost certainly" better than a pension (Sunday Times, August 2016). On the other hand, auto-enrolment is putting everyone into a workplace pension scheme. Additionally, the uncertainty of the future jobs market and the economy means I might need to access savings in the medium term to smooth out my income.
To see the clear difference that the Lifetime ISA could make to long term financial well-being there are a number of things I think would help:
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