By Lydia Fearn, Head of DC & Financial Wellbeing, Redington
Employers, providers and the government need to improve understanding through easily understood communications or the development of educational programmes for younger generations on the importance of saving, not just for the short term but for their future retirement.
While the creation of a LISA is certainly a great savings incentive for the under-40s, it does not combat the core issue of our looming UK retirement crisis. Any major tax change in isolation can be dangerous. We need to do more to encourage a dramatically different savings culture. What we got from the Budget was more technical reform, not a framework to address the fundamental lack of education that lies at the core of one the biggest challenges the UK faces.
The beauty of the Lifetime ISA is that people can clearly understand it – they put in up to a maximum of £4,000 per year to the age of 50 and can get up to a £1,000 top up every year. It is “Easy, Accessible, Timely and Social” – which is how we would like to see all pension arrangements. One of the drawbacks of the pension is that individuals often feel detached from their retirement savings, which is not the case with the simple and accessible LISA.
The under-40s will have further complexity in the choice of their savings vehicles from the introduction of “LISA”. However it is important they understand what they are giving up should they choose to use the LISA to fund their future retirement - such as employer contributions and tax relief.
My cynical self says that it won’t necessarily be used as we would hope – it may well be used by those who have already exceeded other tax-efficient ways to save and use a LISA to fund their children’s house purchase. Only time will tell.
In most cases though, saving through workplace pensions is the most sensible for future retirement savings. I like the fact it is locked away until I am over 55 so it is safe guarded against impulse purchasing or buying a property that I can’t really afford – that is what pension savings are for, to provide that safety net into retirement.
For the under-40s, the choices on how to save are large but I would encourage all to remain in a workplace pension and save as much as they can as early as they can. The sooner you build regular saving into your habits, the better. Those early years of saving will really pay off in the future.
But what about the over-40s? It is wrong to assume those over 40 have all benefitted from amazing house price growth and have gold-plated pensions. The fact is many will not have a DB pension to cushion them and so need to be saving a lot more to be able to support themselves in retirement. I would therefore encourage the government to open the LISA out to all.
As part of financial planning for the future, the Government has committed to implementing the Financial Advice Market Review’s recommendations, including increasing the existing tax and national insurance relief for employer-arranged pension advice from £150 to £500 and look to releasing some of the pension savings to pay for advice. This is good news but we need to promote this more and point people in the right direction to get good and relevant advice.
As I highlighted at the start of this article, the key issue for many is that they are not sure how much to save for their retirement, a lot will depend on what is available at the time – for example will we still have the NHS in its current form, and will pension-age people still get free travel? We don’t know the answer to this but we would like to see a defined national savings target such as aiming for 12-15% of salary as this should enable most to have a reasonable amount saved and have choices when they get to retirement.
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