This is particularly true beyond the age of fifty when the Government matching contribution is switched off. Inadequate retirement savings will force millions of young people to work well beyond normal retirement ages. Unless young employees access financial advice there is a real risk that their desire to save for a house could lead them to put all their savings eggs in the LISA basket, leaving them with a lower income in retirement.
The drawbacks of the scheme include:
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With the average age of a first-time buyer now 31 and rising, millions of young people who use all their ISA funds for a deposit will be in their thirties before they start retirement saving; with a workplace pension they start saving at the age of 22; a recent Royal London Report (‘The Death of Retirement’) found that those who do not start saving until their mid-30s could end up having to work into their 80s to get the sort of retirement that their parents enjoyed;
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With a Lifetime ISA, Government contributions stop at age 50, but the money cannot be accessed without penalty until age 60 apart from in exceptional circumstances; with a workplace pension tax relief continues throughout and money can be accessed at age 55;
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Under the Lifetime ISA there is no matching contribution from an employer; someone who chooses an ISA instead of a workplace pension could miss out on tens of thousands of pounds in employer contributions that they would receive if they stayed enrolled in a workplace pension;
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The average woman in retirement pays no income tax, in which case the promise of tax free withdrawals from an ISA is of no value; in this situation, beyond the age of fifty the ISA offers no effective tax break whereas a workplace pension offers up-front tax relief, boosting the value of the pension saving by 25% for a basic rate taxpayer;
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For higher earners, not saving through a workplace pension means the loss of higher rate tax relief which is not available with an ISA; beyond fifty, the tax break on the ISA is only the equivalent of standard rate relief.
The LISA could, however, be an attractive savings option for self-employed people or for those who want an additional savings vehicle on top of a pension.
Commenting, Royal London Director of Policy Steve Webb said: “The Government claims that the Lifetime ISA is a vehicle for young people to save first for a house and then for their retirement. But with the Government bonus being switched off at fifty, the Lifetime ISA starts to look very unsuitable for retirement compared with a workplace pension. There is a real danger that the new product will mean that many young people will not start pension saving for their retirement until their thirties or beyond and will struggle to make up for lost time. The price of helping young people to buy a house should not be that they have to work until they drop because of inadequate retirement saving.
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