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Workers twice as likely to choose Lifetime ISA over pension

Joanna Faith
Written By:
Joanna Faith

Twice as many workers will save into a Lifetime ISA over a pension and miss out on thousands of pounds worth of valuable employer contributions as a result, a survey suggests.

Online investment management firm, True Potential, polled 2,000 employees across Britain and found 30% of 25-40 year olds will choose a Lifetime ISA compared with 15% who will opt for a workplace pension.

Lifetime ISAs – or LISAs – are set to launch in April 2017 and will give people under 40 the chance to save up to £4,000 a year and receive a 25% government top-up. The funds can only be used to buy a first home or for retirement.

While the LISA was broadly welcomed by the savings industry when Chancellor George Osborne unveiled the idea during his budget speech in March, critics suggest savers will shun workplace pensions and miss out on vital employer contributions and tax relief.

Six million Brits have been automatically enrolled into a workplace pension since the government rolled out its scheme to get more people saving for retirement.

By opting for a LISA over a pension, True Potential said savers could miss out on £20,000 worth of employer contributions.

The firm’s concerns echo a warning from a group of MPs earlier this month, which said the LISA could “distract from the aim of auto-enrolment”, namely to get more people saving more for their retirement.

It is now calling on the government to allow employers to be able to contribute to LISAs to avoid a surge in opt outs.

David Harrison, managing partner at True Potential Investor, said: “The government is caught between a rock and a hard place now because the Lifetime ISA is sure to be popular, but they have rolled out a national pension scheme. Few people will be able to afford to save into both, so in reality there will be a choice. Given ISAs’ popularity and the added bonus of a 25% top-up, MPs are right to be concerned about pension opt outs.

“The only reason that pensions may outperform the LISA is because employers can contribute to a pension. The solution is not to stymie the LISA, but to open it up to employer contributions as well and give savers the best of both worlds. It is time to think of automatic enrolment as national savings not a national pension scheme.

“If employers could contribute to LISA savings, we’d have a level playing field and people could choose the best product for them. That is the way to avoid a surge in workplace scheme opt outs and it avoids the LISA becoming a complementary product used mainly by the better off.”