18th March 2016
The new ‘lifetime ISA’ could force young people to work until they drop, the former pensions minister has warned.
Steve Webb, who was pensions minister under the Conservative-Lib Dem coalition but now works for insurer Royal London, has criticised lifetime ISAs, which were announced in the Budget this week
Lifetime ISAs, which some have dubbed LISAs, are available to those aged between 18 and 40. A person can receive a 25% top-up from the government on money saved up to £4,000 – meaning for every £4 saved the government will give £1. A person can contribute and receive the government bonus up to age 50.
The money can be used to buy a home worth up to £450,000 or accessed after age 60 tax-free to pay for retirement. If the money isn’t used to buy a home or accessed before age 60 the government bonus is removed and a 5% charge levied.
However, Webb believes the lifetime ISA would be an unsuitable retirement product for many people, especially if they opt out of their workplace pension to contribute in to the ISA as they would miss out on their employer contributions.
He said there is also a danger that the government turns off the bonus top-up at age 50 and this could result in inadequate retirement savings that ‘force millions of young people to work well beyond normal retirement ages’.
Webb said there were a number of drawbacks, including the fact that the average first-time buyer is now 31-years-old and ‘millions of young people who use all their ISA funds for a deposit will be in their thirties before they start retirement saving’. This compares to auto-enrolment pension saving which start at age 22.
He also criticized the government for stopping top-ups at age 50 but at that point the money cannot be accessed without penalty whereas a workplace pension continues to offer relief on all contributions and the money can, currently, be accessed at age 55.
Younger people will also miss out on employer contributions if they choose to save into an ISA rather than a pension.
‘The government claims that the lifetime ISA is a vehicle for young people to save first for a house and then for their retirement,’ he said. ‘But with the government bonus being switched off at 50, the lifetime ISA starts to look very unsuitable for retirement compared with a workplace pension. There is a real danger that the new product will mean that many young people will not start pension saving for their retirement until their thirties or beyond and will struggle to make up for lost time.
‘The price of helping young people to buy a house should not be that they have to work until they drop because of inadequate retirement saving.’