Young people are unable to judge whether the new Lifetime Isa offers a better savings prospect than a pension due to widespread confusion over how the benefits compare, new research shows.
The savings account for the under-40s, known as the “Lisa”, launched this week. With an eye-catching 25 per cent bonus from the UK government worth up to £1,000 per year, it can be used to save for a first home or for retirement.
For those saving to buy a property, the bonus is more generous than the existing Help to Buy Isa. However, many critics of the Lifetime Isa say the product may encourage young workers to abandon retirement saving in order to get on the property ladder.
Nearly half of young people polled by the FT and the consultancy BritainThinks thought that higher-rate taxpayers would be better off saving in a Lifetime Isa than a pension, reflecting a lack of understanding over how pensions tax relief works.
Seventeen per cent did not know what income tax band they were in, according to the poll of 1,008 UK adults between the ages of 18 and 39. The poll was conducted last month, two weeks before the Lifetime Isa launch on Thursday.
When asked if they would prefer to pay into a Lifetime Isa instead of a pension, 38 per cent of those polled agreed.
Former pensions minister Baroness Ros Altmann said that the Lisa had “mis-buying and mis-selling risks written all over it”.
“If someone opts out of a pension scheme at work or just plans to use cash, this would be a real concern,” she said, adding she worried young people would plump to save into the Lisa instead of a pension, thinking the 25 per cent bonus would be more valuable than pensions tax relief, plus any employer contributions.
In fact, the 20 per cent basic rate of tax relief on pensions contributions is equivalent to the 25 per cent bonus on a Lisa, which is subscribed to out of post-tax income. The 40 per cent higher rate of tax relief on pension contributions comfortably beats it. Employer contributions would further boost a pension’s value.
Money invested into a pension or Isa wrapper can compound tax-free over time. But 56 per cent of those polled did not know what compound interest was, and the majority of respondents said they would use the Lifetime Isa like a cash Isa, rather than a stocks and shares Isa, depriving their long-term savings of potential investment growth.
“Two million under-40s have just been successfully auto enrolled into a pension, and now something shiny and new has come along that could undermine that,” said Sir Steve Webb, the former pensions minister and current director of policy at Royal London.
John Ralfe, an independent pensions expert, said he thought young people would be more likely to engage with retirement saving if the system was clearer.
“As the FT research clearly shows, Lisas have the huge virtue of being very simple versus a pension — for every £1,000 you save, the government adds £250,” he said. “It seems likely that employers will develop work-based Lisas for younger staff so they can also top-up people’s savings, just like pensions.”
Nearly one-third of those polled said they would turn to their parents for advice about the Lifetime Isa.
“Not only is wealth inherited, but knowledge about wealth is inherited too,” said Deborah Mattinson, co-founder of BritainThinks.
“So many millennials are looking to their parents for actual financial help, plus help in terms of advice. Which begs the question — what about those young people who don’t have parents who can support them in this way?”
UK high street banks have so far shunned the Lisa, although three investment platforms — Hargreaves Lansdown, Nutmeg and The Share Centre — all launched products on Thursday, the start of the new tax year. Hargreaves reported that 1,000 Lisa accounts were opened within the first 12 hours.
The Treasury said it expected banks, including Skipton Building Society, to launch more products later this year.
Up to £4,000 per year can be saved in a Lisa, attracting a maximum annual bonus from the government of £1,000, which can then be used to buy a first home worth up to £450,000 in value, or accessed after the age of 60.
However, withdrawals for any other purpose will be subject to a 25 per cent penalty charge. As well as losing the bonus element, this equated to an “exit penalty” of 6.25 per cent on savings, Baroness Altmann said.