The Treasury Committee wants Lifetime ISAs to be scrapped and self-employed individuals auto-enrolled into pension schemes via self-assessment and national insurance contributions. It also says pension tax relief does little to incentivise saving for lower-income savers.
Overall, it is worried that households are over-indebted and lack a rainy day savings fund, so something needs to be done to reverse the situation.
Wage growth has reached its slowest rate in the last decade than at any point since the mid-19th Century and productivity growth has been poor since the financial crisis.
Should forecasts be correct about labour productivity staying weak, the Treasury Committee warns there could be long-term negative implications for household incomes, and most directly for wages and salaries.
LIFETIME ISA ‘TOO COMPLEX’
A Government report last year found 12m people in the UK weren’t saving enough for their retirements. Auto-enrolment has provided a boost to savings rates, but the Treasury Committee says further pension reforms are needed to ensure individuals have enough money in retirement.
It is worried that the Lifetime ISA is too complex and doesn’t appear to be very popular with either the financial services industry or pension savers.
Baroness Ros Altmann, former minister of state for pensions, previously said the wrapper confuses a house purchase with a pension ‘in a very unhelpful way’. She also said Lifetime ISAs have the wrong behavioural incentives.
‘First of all, the contributions stop at age 50. Actually, most people can start affording a bit more than that, but if you are in the lifetime ISA as a retirement?savings vehicle, come age 50 you will think, “I have done that. That is me sorted,” so you will not do any more.
‘[Secondly], unlike the lifetime ISA, where you can get your hands on the money tax?free at age 60, the pension has built?in disincentives for you to spend it too early; you face big tax penalties? If people start relying on ISAs and LISAs for retirement, they are bound to be pretty poor in their 80s.’
LIFETIME ISA PENALTY CONFUSION
The Treasury Committee says the Government hasn’t been clear enough about the penalty for early withdrawals, where savers lose not only their 25% bonus but also a fraction of their capital.
While it says the standards of disclosure on the Government website ‘fall far below those expected of regulated firms’, it should be noted that details regarding early withdrawal penalties have been widely reported by the media and Lifetime ISA providers have clearly stated the associated risks.
Regarding retirement saving in general, the Treasury Committee says there is inadequate understanding by many people of pension freedoms and the associated choices.
It says one possible solution is to encourage more people take advice or look at free guidance options.
MORE WORK NEEDS TO BE DONE
‘The Committee’s report is wide ranging with a smorgasbord of suggestions and proposals that emphasise just how complex the long-term savings market has become in the UK,’ says Laura Suter, personal finance analyst at AJ Bell.
‘Complexity is the enemy of engagement, so the Committee is right to highlight measures to simplify things for consumers and help them manage their finances. However, the report looks at lots of different areas in isolation and arguably more could be achieved by an overarching piece of work that looks at the long term savings market as a whole and areas where it can be simplified to benefit consumers.
‘For example, the Lifetime ISA has introduced complexity but there is a danger that scrapping it 18 months after introducing it, just as the product is becoming established, would further dent consumer confidence in the savings market. Such a drastic move should be considered within the context of wider changes that could help savers.’
SAVING INTO TWO JARS OF MONEY
The report also considers expanding the ‘cash sidecar’ proposal currently being trialled by workplace pension scheme Nest, to allow people early access to a portion of their pension fund. The sidecar savings model enables people to put money aside into both their pension pot and a liquid account via payroll deduction.
In Nest’s example, savers need to contribute an amount over and above the minimum level set for auto-enrolment. The money is then split between a liquid sidecar account and a pension pot, with additional contributions initially going into the liquid account.
When the liquid balance reaches a savings cap, all contributions roll into the pension pot. If the saver withdraws cash, the additional contributions would once again top up the liquid account until the threshold is reached.
‘We’re interested to see the outcome of the trial, but are concerned that the details of how these “sidecars” could work and the instances when you can access them could become horrendously complicated,’ comments Suter.
‘Instead, an education programme encouraging individuals to keep some of their long-term savings outside of their pension and in cash could be more beneficial.’
