The PPI research covers five countries – Australia, Canada, New Zealand, Singapore and the USA – and looks at the pensions and long-term savings system in each. The findings raise a number of issues about the impact of the LISA on long term savings in the UK which will need to be addressed. Key findings include:
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In all of the countries studied, some element of ‘early access’ to savings for reasons such as house purchase or ill health, is integrated into the pension system. This means that individuals do not have to make a potentially difficult choice between saving in a pension or a long-term savings product with early access. In the UK, those who want early access and so choose a LISA rather than a workplace pension are likely to lose the valuable contribution made by their employer. PPI estimate that the loss of the employer contribution could cost savers up to one third of their future pension fund;
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In those countries which allow early access to savings, money is often invested in liquid, lower-risk, lower-return assets. There is evidence of this in New Zealand and in the US. Similarly, in the UK the investment choice for existing ISA savers is overwhelmingly in cash, particularly among younger savers. If Lifetime ISAs follow the same pattern, savers could end up with lower incomes in retirement than if the same money had been invested through a higher-return investment strategy in a pension scheme;
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While Canada and the US allow borrowing from a pension, there is a requirement for the money to be repaid. This means that there is no long-term damage to retirement savings. In the UK there are currently no plans that withdrawals from a LISA for a house deposit would have to be repaid. Withdrawals for purposes other than house purchase will be subject to a 5% penalty and the loss of the government contribution, further damaging the eventual retirement savings pot;
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Whilst savers using the New Zealand ‘KiwiSaver’ have the option of taking a loan towards house purchase, only 1.8% out of around 2.5 million savers had made a withdrawal for a first home; however, in the UK the LISA has been specifically designed to support home-ownership, so the proportion withdrawing all or most of their LISA for a deposit before starting to save for later life is likely to be much higher;
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The countries studied integrate their pension and long-term saving products, so there is a well-established route to turn those savings into income in retirement. In the UK it is not yet clear how LISA savers will secure their retirement income;
The PPI research also highlights the differences in consumer protection between LISA and workplace pensions. With a LISA there are no plans for a cap on charges and no trustee or governance committees to ensure that funds are invested in line with the best interests of the saver. The report notes that higher charges can significantly erode the final value of a savings pot.
Commenting on the research, Steve Webb, Director of Policy at Royal London, said: “This new research highlights the challenges which arise from the UK’s decision to have two separate long-term savings vehicles – a Lifetime ISA and a workplace pension. Unless individuals can afford to save in both, they will have a difficult choice to make. Giving up a workplace pension with an employer contribution in favour of a LISA could prove very costly in the long-run.
“There is also clear international evidence that money held in savings accounts which can be easily accessed tends to be invested in lower-risk, lower-return assets. By contrast, money locked up in pensions is generally invested for the long-term and is likely to generate better returns. Using an accessible savings vehicle such as a LISA for long-term savings could significantly damage consumer outcomes.
“This research reinforces the need for guidance and help for people of all ages when it comes to long-term saving choices.”
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