Workplace ISA: could another pension and saving scheme be on the horizon?
In the 2016 Budget, the government unveiled the Lifetime ISA to help people under the age of 40 buy their first home and save for retirement at the same time.
Set to launch in April 2017, the Lifetime ISA (LISA) will allow people to contribute a maximum of £4,000 each tax year and receive a 25% government bonus – so up to a maximum of £1,000.
The money saved must either go towards the individual’s first home or their retirement (60+). If you don’t use the money towards a home, early withdrawals will carry a 5% charge and mean sacrificing the government bonus and any interest on it.
Following the announcement, LISA was hailed as “well-suited” for the self-employed but was condemned by some in the pensions industry amid concerns it could undermine auto-enrolment and lead to the recently launched Help to Buy ISA being phased out.
Earlier this month, Michael Johnson, a research fellow at think tank group The Centre for Policy Studies (CPS) who originally came up with the idea of the LISA, made a number of recommendations to “increase the appeal of LISA” amid the criticism.
And he’s now gone one step further by calling for a Workplace ISA.
Workplace ISA explained
During a select committee debate on the LISA, Johnson told members he did not want to compromise the success of auto-enrolment but envisages a complement to the LISA scheme: a Workplace ISA. “Very simply it sits inside the LISA and receives employer contributions plus the same 25% bonus as LISA receives. It is part of auto-enrolment legislation and employee contributions under the auto-enrolment framework would go into the employees LISA to sit alongside.”
He added that it would be one simple savings vehicle to serve “from the cradle to the grave” and while the rules are similar to LISA, there’s one major exception. He recommends that contributions are locked in till 60. “Employer contributions are locked in until 60 along with the 25% bonus whereas the employee contributions within auto-enrolment would go into LISA and be subject to the same LISA rules.”
Johnson said the Workplace ISA offers four substantial benefits.
1) It puts the employee in control so they can decide whether they want their employer contributions to go into LISA, a Workplace ISA or an existing pension framework. It would not replace a pension; it would be an alternative and it is for the individual to choose according to their personal circumstances.
2) Over the next two and a half years, employee contributions will rise by a factor of five while today it is 0.8% of band earnings plus 20% tax relief. From October 2018, those figures will be 4% and 1%, so, Johnson said, “we’re about to start to walk into a wall of ramp-up”. He added that it is crucial to put in place something like the Workplace ISA with added flexibility in order to deter opt outs.
3) It would encourage the government to think about the 4.6 million self-employed who don’t have an employer sponsor and who don’t come under the auto-enrolment sector.
4) In order to reinforce auto-enrolment, Johnson said it’s to do with ‘Treasury business’ and the whole question of National Insurance Contributions (NICs) relief on employer contributions. Last year that was worth £13.8bn. He added that NICs relief on employer contributions is invisible to the employee, it benefits shareholders but not directly the individual with a savings pot. He would like to see NICs relief scrapped and have the £13.8bn redirected to fund the bonus of LISA and the Workplace ISA so “people can see it’s real”.
Martin Tilley, director of technical services at Dentons Pensions said a Workplace ISA is a step too far.
He said: “My own view is that we need some certainty of government intention and a clear strategy set out if the ISA route to retirement planning is the intended course. There have already been around 10 different types of ISAs and the LISA is not even live before changes are proposed. A Workplace ISA is just one step too far, too quickly for me.”