Yesterday George Osborne announced a new form of saving designed to help young people save for their retirement. This was called the Lifetime ISA. It’s not entirely clear what the Lifetime ISA is, and how it will work, but it could have potentially damaging effects unless the Government gets the detail right.
By placing harsh penalties on removing money from a Lifetime ISA before you’re 60, the Government is suggesting that it is intended to work as some sort of pensions alternative (it can also be used to pay a deposit on a first property, but in that way it is effectively a Help-to-Buy ISA). However, at the same time, because it’s not explicitly a pension, employers can’t pay into it, and it could have negative consequences when interacting with the benefit system.
At this point it seems the Lifetime ISA is an effective form of saving for retirement for people paying a basic rate of income tax, and who want to save more than the amount required to get their employer to pay into their pension. It clearly isn’t a primary pension replacement for young people, because although the Government will offer a 25% bonus on everything saved, this is less than what they could expect to receive from employers matching their pension contribution. This means that, by and large, it will only be for those people with high enough incomes to make ends meet each month, who can afford to pay their pension contribution, and then who still have additional money left to save for their pension. With this in mind, it suggests that Lifetime ISAs are primarily a product for richer, younger people.
However, over time people’s circumstances often change, and if a person suddenly sees a dramatic fall in their income or rise in their household needs, the Lifetime ISA could prove to be a big problem.
As it currently stands, Universal Credit dramatically decreases the amount of support that you get if you have savings of £6,000, and you get no Universal Credit at all if you have savings over £16,000. If a person has paid into their Lifetime ISA, effectively treating it as a pension, but then suddenly needs state support, they could be in a very bad position.
For example, if a person puts £16,000 into a Lifetime ISA whilst they are in their early 20s, with no children and a good job, all seems well. But fast forward to their thirties, when they may have kids, or may have lost their job in a downturn, and they could desperately need state support. They would be entitled to none, it seems. Effectively they would have to spend their pensions saving (minus a 5% charge and minus the government bonus) before they could receive any state support. The upshot would be that moving into poverty would also make you lose your pension savings. That is a terrible idea – it’s effectively a Government gambling scheme, where ordinary people have to bet on whether they will need state support in future or not.
If losing a job for a short period could both put you in poverty in the short term, and potentially make you much worse off when you’re 60, then it doesn’t seem that the Lifetime ISA represents a good way for young people to save for their retirement. The Government should fix this by making the Lifetime ISA exempt from the Universal Credit savings limit, if it does see it as a genuine pension alternative. If it doesn’t see it as a pension alternative, then the question remains as to why it is offering more subsidised saving for wealthy households. To be in a position to say that you know you will never need state support means that you are very wealthy indeed. If this is who the Lifetime ISA is for then it appears to be a tool for the privileged to make them more privileged, and the money spent should be used for other things. This is especially the case when there are better uses for public money, such as making the Help to Save scheme for low-income households more generous. Either way, if the Government doesn’t want the Lifetime ISA to be an expensive bung to the well off, more work is definitely needed.
Tim Stacey, Senior Policy and Research Advisor