The chancellor announced a radical new savings vehicle for individuals, the Lifetime Savings ISA, or LISA, in the budget. These could fundamentally change the way individuals approach long term savings and are likely to play a prominent role in workplace benefits packages. HR directors should take note.
Why offer LISAs in the workplace?
Our analysis of workplace retirement savings doesn’t reveal a great picture. Over 60% of private sector employees are unlikely to be able to retire on levels of income that the government suggests is adequate.
Despite employers spending an average of 7% to 10% of pay on pensions, this spend doesn’t deliver anywhere near the same engagement impact as a 7% to 10% pay rise and employees aren’t typically willing to pay much of their own money into a pension – particularly the under 50s.
The accessibility of LISA monies (albeit with a penalty) and the ability to use LISAs for both house deposit and mortgage repayment mean that LISAs will be a much more engaging solution than pensions for long-term savings.
Compare the messaging…
- Pension: “We offer a competitive pension scheme that helps you save for retirement.”
- LISA: “We can help you save for a house deposit and can save you up to £300 a month on your mortgage repayments.”
No prizes for guessing which message will get you most engagement impact.
As well as housing and retirement support, the government has promised to investigate other penalty free LISA access options. For example, borrowing up to £30,000 from a LISA as long as it’s paid back. Imagine the messaging around that: “We can support you in financing your MBA… or repaying student debt… or buying a new conservatory…”
What are the problems?
We see LISAs becoming a core part of savings propositions offered by employers, working alongside pension, share plans and ISAs to provide a coherent savings strategy to meet the short, medium and long-term needs of employees. But, as these plans are designed, there are problems to think about:
- For many employees, LISAs are not a pension alternative. For example, some employees may be tempted to access LISA money (despite the penalties) at times of perceived need – this may create long-term problems in workforce planning. At the other extreme, LISAs are substantially less tax efficient than pensions for higher and additional rate tax payers.
- LISAs are more expensive for employers: The National Insurance position of employer pension contributions means that pensions are 14% cheaper for employers than LISAs.
- LISA investment solutions are underdeveloped: The investment solutions currently offered in an ISA framework are not suited to the long-term savings requirement of a LISA. Charges are also high compared to the pension market.
All of these problems can be overcome. Employers that embrace LISAs now will undoubtedly gain a competitive edge in the battle for talent. Not only that, they’ll be in a strong position when it becomes the norm for long-term saving.
Chris Noon is partner at Hymans Robertson