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The Workplace ISA: ‘A powerful tool to discourage auto-enrolment opt-outs’

Written By:
Guest Author
Posted:
22/04/2016
Updated:
22/04/2016

Guest Author:
Paloma Kubiak

Just a week after announcing the idea of a Workplace ISA during a select committee meeting which looked at the impact of the Lifetime ISA, a think tank fellow has now urged the government to introduce the scheme in a bid to discourage auto-enrolment opt-outs.

The recent surprise announcement of the Lifetime ISA (LISA) to help people under the age of 40 buy their first home and save for retirement at the same time has been met with criticism from some in the pension industry.

Set to launch in April 2017, the 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.

Critics condemned the scheme amid concerns it could undermine auto-enrolment and lead to the recently launched Help to Buy ISA being phased out.

As a result, a select committee meeting took place last week, where Michael Johnson, the research fellow who came up with the idea of the LISA, recommended that a Workplace ISA be created to run alongside the saving scheme.

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And now the think tank group, the Centre for Policy Studies, urges the government to introduce the Workplace ISA as a ‘powerful tool to discourage auto-enrolment opt-outs’.

The key features of the Workplace ISA:

  • The Workplace ISA should be included in the auto-enrolment legislation and it should be open to all auto-enrolled employees under the age of 40.
  • Employer contributions, taxed at the employee’s marginal rate, may be paid into a Workplace ISA until the age of 50 (as per LISA). They should be accompanied by the same 25% Treasury bonus as that intended for the LISA.
  • Withdrawals from the Workplace ISA should not be permitted until the age of 60 and after they would be tax-free.
  • Auto-enrolled employee contributions, made with post-tax income, may be paid directly into the employee’s LISA. They would be subject to the same tax, withdrawal and penalty rules as other LISA savings, also eligible for the Treasury’s 25% bonus.
  • Employer and employee contributions should share an annual contributions cap of £10,000, subject to Treasury cost modelling.
  • The Workplace ISA could be housed within the LISA, leaving the individual with a single retirement savings vehicle.
  • Workplace ISA assets should enjoy the same Inheritance Tax treatment as today’s pension pots and should be excluded for means-testing purposes, as per today’s pension assets.

Workplace ISA perhaps for implementation in 2018

Michael Johnson, the author behind the Workplace ISA publication, said: The Lifetime and Workplace ISAs, operating together within the auto-enrolment framework, would help many people of modest means achieve a goal that was originally proposed in a 2012 paper aimed at catalysing the broad-based savings culture that the UK so desperately needs.  The majority of the population should be encouraged to set themselves one simple goal at the point of retirement: to be a debt-free home owner. Thereafter, they could perhaps downsize to top-up their retirement income, and perhaps finance long-term care.

“Ideally, the Workplace ISA will be announced in the 2016 Autumn Statement, after a summer spent assessing the public’s response to the Lifetime ISA, perhaps for 2018 implementation. It would, of course, compete with today’s occupational pensions savings schemes.”