Following on from the Resolution Foundation’s recent findings that home ownership is the lowest in 30 years, Aegon has questioned whether the Lifetime ISA (LISA) will truly be used for the dual aims of saving for a first house deposit and also for retirement.
It has also asked whether each aim is better served through distinct means.
The LISA was announced in this Spring’s Budget. Due to go live from April 2017, under 40s will be able to use it to save for either a first house deposit or for retirement. Contributions up to £4000 a year, paid up to age 50, would receive a 25% government uplift. Proceeds would be paid free of any income tax provided used for a first house deposit or taken from age 60. Otherwise, the 25% government bonus would be reclaimed and an additional 5% charge would apply.
The LISA is scheduled to replace the Help to Buy ISA. It would also offer a new retirement savings option for some, particularly under 40 self-employed individuals paying basic rate tax. However, Aegon argues that employees would almost always continue to do better saving through a workplace pension where they receive an employer contribution as well as tax relief worth the equivalent of the 25% government bonus on the way in.
Steven Cameron, pensions director at Aegon, said: “With home ownership at a 30 year low, the importance of government supporting first time buyers has never been higher. This is already on offer through the Help to Buy ISA and this could be made more attractive, perhaps by increasing the maximum contributions eligible for the government bonus.
“The government has proposed replacing the Help to Buy ISA with the Lifetime ISA which aims to allow under 40s to save for either a deposit or retirement or in theory both. But getting on the housing market is becoming even harder and the average age of a first time buyer has crept steadily up to 33. As result it’s questionable if the Lifetime ISA would truly be used for retirement savings, given most people will be well into their careers before they buy a house and we must avoid people ‘kidding themselves’ that their LISA savings are going towards retirement planning or even worse opting out of a workplace pension.
“With automatic enrolment continuing to grow, employees will almost always be better off saving for retirement through a workplace pension where they receive a valuable employer contribution. For many, saving for retirement and for a house deposit are very distinct plans, requiring different investment strategies, and attempting to combine them into a single product may do more harm than good.
“We support the government helping younger people to save for both a house deposit and for retirement but whether combining them into a single product is right needs reviewed. An alternative ‘joined up’ solution might be to enhance the Help to Buy ISA and offer those with funds not needed for house purchase the opportunity to transfer them into a pension with a 25% uplift, equivalent to basic rate tax relief.”