Parliament is debating the legislation for the proposed Lifetime Individual Savings Account on Monday, and will set out how it will work.
The Lisa will encourage those aged between 18 and 40 to save up to £4,000 a year with a very generous 25 per cent government monthly top-up, which they can use to buy a home in their thirties, or for savings later in life.
The aims are in line with the government’s manifesto to help people on to the housing ladder, in a familiar savings wrapper, with implementation scheduled for next April. So what’s not to like? Unfortunately, quite a lot.
The problem is that when it comes to savings, we don’t start with a blank sheet of paper. We already have a mind-boggling collection of pension and other savings products, with every recent government tempted to try to be the savings industry’s product designer.
The stakeholder pension, created under Tony Blair’s government, died a quiet death. And we should be careful of not unintentionally doing the same to the auto-enrolment scheme, implemented by the coalition government, and backed by the government-owned pension provider Nest, to ensure that every employer offers millions of employees a workplace pension. This is a noble cause. Why is that at risk?
Today, auto enrolment has 6.9m new savers signed up to a pension and another 3m more still to come. Crucially, contributions are tax free, and both government and the employer contribute too. By contrast, any savings into a Lisa come from taxed income and the employer does not contribute anything. But all of that is as nothing compared with the guaranteed Lisa incentive: 25 per cent a year, an unimaginable no-risk annual return on any asset class.
So there will inevitably be a flood of savers switching from existing Isas (especially cash Isas) and new money going into the Lisa. Better-off workers and retirees will find the spare cash to get their children and grandchildren’s savings moving.
The problem is that the lowest earners will not have enough both to save through their auto-enrolled pension (especially as their contribution level increases sharply to 4 per cent by 2019), and to have taxed income to spare for a Lisa.
We are bound to see a rapid increase of opt-outs from auto enrolment, especially in 2019, and people instead opening Lisas. Employers will not mind this as they will not have to pay their (2019) contribution of 3 per cent into their workers’ pension pots.
The likely result is that building long-term savings through auto enrolment, with government, employer and employee all contributing, will be severely set back. The Lisa may prevent auto enrolment from being the growing source of later-life income that it could be. That, in turn, could have implications for future social security pressures.
Does this matter? Some believe that no one understands pensions, they are too inflexible and everyone prefers Isas (which you can cash in tax free). Use that brand to mobilise house buying and savings, they say, and don’t worry about which product the money goes into: it is the savings generated that matter.
A growing proportion of people neither own a home nor have a pension.
And I might, broadly agree, except that taxpayers are paying for the Lisa top-ups (estimated at £850m by 2021). So who will benefit the most?
The government has not given us any breakdown but my instinct is that the biggest beneficiaries will be existing savers who are transferring assets, and families of higher-rate earners — the opposite of those intended to benefit from auto enrolment.
Finding £4,000 out of taxed income will not be easy for those on the average wage for my Gloucester constituency of about £24,000: my constituents will not be able to save nearly that much. So the Lisa, while available to all, risks principally benefiting the few.
Moreover, the Lisa is criticised by many in the savings industry, and ignores the concerns of the previous two pension ministers, the work and pensions select committee, the ABI and other professional bodies. There is an FCA consultation that ends only a few weeks before it is supposed to be introduced next April.
This is not the best backdrop to the introduction of a new savings product with such generous incentives. I am convinced that piecemeal Treasury product design is not the answer and a wider consensus on savings is needed. And because we have such a feeble opposition, deeply entangled in civil war, it is for Conservatives to call for this.
It is not too late for the chancellor to pause and reconsider the whole savings landscape. I recommend he establish a savings commission. Led by an independent figure, this body should work out how we can best stimulate savings for homes and retirement, without adding unnecessarily to the range of offerings, creating competing government products or giving generous tax breaks to the few. The remit should include current tax breaks for pensions and savings instruments. Let it be formed quickly and give recommendations within six months.
The Lisa is the product of the last Treasury’s habit of tinkering with product design for savings, its dislike of pensions, its preference for tax up front (and so Isas) and its inability to work effectively with the Department of Work and Pensions on this issue. The new chancellor and work and pensions secretary have the chance to change all that, and provide solutions better suited for the many.
Pausing the Lisa would be a good start.