Challenges of unintegrated long-term savings system exposed

23rd June 2016 - Pensions Policy Institute research shows challenges of unintegrated long-term savings system

Recent research published by the Pensions Policy Institute (PPI) says giving up a workplace pension with an employer contribution, in favour of a Lifetime ISA, could prove very costly in the long run.
The research looked at the pensions and long-term savings system in five other countries – Australia, Canada, New Zealnad, Singapore and the USA – and compared them with the Lifetime ISA and pension combination we will have in the UK from April 2017. Their findings were as follows:

1. Loss of the employer contribution could cost savers up to one third of their future pension fund
In each of the five countries, early access to savings (for house purchases or ill health, for example) is integrated into the pension system. In the UK, this is not possible, so those who want early access to their savings will need to either invest in both a pension and the Lifetime ISA (LISA), if they have enough spare money to do so, or will be more likely to choose the LISA over a pension. If they choose the latter, the PPI fear that the loss of the employer contribution could cost savers up to one third of their future pension fund.

2.  Putting money in low-risk, low-return assets could result in lower incomes in retirement
Where early access to savings is available in these countries, money is often invested in lower-risk, lower-return assets. Similarly, in the UK, cash ISA savings have always far outweighed stocks and shares ISA savings. If the same remains true for LISAs, savers could end up with lower incomes in retirement than if the same money had been invested in stocks and shares or other higher-risk assets with potentially higher returns.

3. LISA withdrawals could damage long-term returns
Canada and the US go a step further by allowing borrowing from a pension, but there is a requirement for the money to be repaid, so there is no long-term damage to retirement savings. In the UK there are currently no plans to stipulate that withdrawals from a LISA for a house deposit would have to be repaid. Withdrawals for purposes other than a house purchase will be subject to a 5% penalty and the loss of the government contribution, further damaging the eventual retirement savings pot.

4. Funding house purchases via LISAs could result in delayed saving for later life
In New Zealand less than 2% of the 2.5 million 'Kiwisavers' have chosen to make a withdrawal for a first home. However, in the UK, the LISA has been specifically designed to support home ownership, so the proportion withdrawing all, or most, of their savings for a deposit before starting to save for later life is likely to be much higher.

5. Turning UK savings into retirement income unclear
Pensions and long-term savings products are integrated in the five countries studied and there is a well established way of turning those savings into income in retirement. In the UK, it is not yet clear how LISA savers will secure their retirement income.

Steve Webb, Director of Policy at Royal London, the company sponsoring the research, said: “This new research highlights the challenges which arise from the UK’s decision to have two separate long-term savings vehicles – a Lifetime ISA and a workplace pension. Unless individuals can afford to save in both, they will have a difficult choice to make. This research reinforces the need for guidance and help for people of all ages when it comes to long-term saving choices.”