Mike Morrison argues the Lifetime ISA and traditional pension saving can work side by side. But, he asks, do the target markets have enough spare cash to fund both?
The last few weeks since the Budget have brought ISAs back into the spotlight and along with them the whole ‘savings' debate.
Is the Lifetime ISA designed to stand alongside pensions? Or is it the first stage in expanding the role of ISAs to ultimately replace the pension regime? A move from EET to TEE via a pension ISA could not be agreed by consultation so instead we get an ISA pension through the back door?
We now have cash ISAs, stocks and shares ISAs, JISAs, innovative finance ISAs, help to buy ISAs and now, as announced in the Budget, the Lifetime ISA.
And there has already been the call for a further ‘workplace ISA' which would either sit alongside or replace the auto-enrolment pension.
The Centre for Policy Studies (CPS), a prime mover in the pensions ISA movement, has already set out its blueprint for the future and its proposals for the development of the Lifetime ISA, namely:
1. Double the contributions bonus rate from 25% to 50%
2. Double the contributions cap (to £8,000)
3. Introduce a default fund
4. Link in cash ISAs
5. Assimilate today's Child Trust Funds and Junior ISAs into the Lifetime ISA
The possible endgame can be clearly seen in the CPS report:
"The Lifetime ISA combines within a single savings vehicle some of the attributes of today's ISAs with those of pensions savings: a savings chameleon."
It adds: "The Lifetime ISA should provide some competition to the private pensions arena. But, hopefully, this is only the first step towards merging the disparate worlds of 'pensions saving' and 'saving' into a single, coherent framework."
On one hand, the concerns with moving to TEE have been well publicised, and it could well mean fundamental problems for pension saving as an important social policy if they become (even more of) a political football.
On the other hand, it is important to be pragmatic, and it looks like we will move towards ISAs as people make their choice - let's be realistic, anything that says it will assist with a house purchase should prove very popular.
Using your savings to buy a house might be a priority now but securing an income for the rest of your life should never be discounted
Side by side
But does it need to be a binary choice? A good number of people I have spoken to since the Budget have concluded that the ideal will be to split savings between the Lifetime ISA and a pension. The head (and the numbers) might say auto-enrolment but you can't live in a pension and the young heart could well favour the Lifetime ISA. There may well be room for both.
Either way, we must get to a point where we are agreed on the savings objective - for short-term utility or for long-term retirement - and how a tax wrapper is designed to favour one objective over the other, whether directly or indirectly!
Alongside the savings objective also lies the means for saving, and in the ideal world everyone would perhaps put a bit into a pension and a bit into a Lifetime ISA to address at least the two previous saving objectives. However, this is not an ideal world, and the ability to do this might not always be there.
As ever, I get the feeling that financial education advice and guidance has never been so important. Using your savings to buy a house might be a priority now but securing an income for the rest of your life should never be discounted.
Mike Morrison is head of platform technical at AJ Bell
