Room for both: Can pensions and Lifetime ISAs work together?

Is it a binary choice?

clock • 3 min read

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

More on Pensions

British Steel a stark reminder of obligations around client files

British Steel a stark reminder of obligations around client files

Lawyer Philippa Hann reflects on her work around the pensions case

Hope Coumbe
clock 27 March 2024 • 2 min read
SSAS and the general levy: A victory for common sense

SSAS and the general levy: A victory for common sense

The value of SSASs after general levy consultation outcome

Caitlin Southall
clock 26 March 2024 • 5 min read
Pension dashboard operators join forces to push project forward

Pension dashboard operators join forces to push project forward

Coalition aims to bring 'dashboards to consumers as early as possible'

Jasmine Urquhart
clock 25 March 2024 • 2 min read

In-depth

March 2024: Month in review with deputy editor Jenna Brown

March 2024: Month in review with deputy editor Jenna Brown

Take a look at some of the news and feature highlights of the last month

Jenna Brown
clock 28 March 2024 • 5 min read
Will IFA-owned platforms take over the financial advice sector?

Will IFA-owned platforms take over the financial advice sector?

PA talks to industry experts on the future of adviser-owned platforms

Sahar Nazir
clock 27 March 2024 • 9 min read
PA Awards 2024: Winners' photo gallery from the night!

PA Awards 2024: Winners' photo gallery from the night!

The industry's best were celebrated in London last Wednesday

Professional Adviser
clock 26 March 2024 • 1 min read