Research by employee benefits firm Capita found that 34% of employees aged between 16 and 34 said they would rather use an ISA to save for retirement than a pension, while half – 15% – disagreed.

The government announced in this year’s Budget the launch of a new type of ISA, the Lifetime ISA (LISA). Set to launch in April 2017, it would allow young people (under the age of 40) to buy their first home and save for retirement at the same time.

They will be able to save up to £4,000 each tax year and receive a government bonus of 25%. That means people who save the maximum each year will receive a £1,000 bonus each tax year from the government.

As part of Capita’s annual Employee Insight Report looking at attitudes towards pensions and retirement, the firm found if offered a straight choice between a pension and LISA, most young employees said they’d rather stick with a pension.

But 38% of 16 to 34-year-olds said that if they could access their pension more flexibly (for example to buy their first house) they would be willing to give up the pension contribution their employer pays. However, 42% said they would not.

Trust in pensions industry increases

Capita found that trust in the pensions industry is steadily increasing with 39% of employees saying they did not trust the pensions industry, and just 16% disagreeing. This is up from results recorded in 2014, and 2015 where 47% and 43% respectively said they didn’t trust the pensions industry

Turning to pension freedoms, the report found that it had not had a significant impact on savers’ retirement plans. Just seven per cent of over 55-year-olds said their retirement plans had changed as a result of new pension freedoms, while 76% said their plans remained unchanged.

Nearly half of the 3,000 employees surveyed said they found pensions-related terminology complicated and confusing, as well as being a barrier to planning effectively for retirement. As a result, 57% of employees said they would happily see further changes to pension rules if it made them easier to understand.

Anish Rav, head of DC proposition and strategy at Capita, said: “It’s easy to see how LISA could become popular, but it’s crucial that younger employees properly evaluate just what they will be giving up if they do decide to stop saving into their pension to redirect into a LISA.

“While the research reveals growing trust in the pensions industry, it is also clear employers need to be doing as much as possible to explain and communicate the options their employees have at their disposal.”