Budget 2016: Lifetime ISA presents new dilemma for young savers
Research from Capita Employee Benefits suggests that young employees will happily embrace the introduction of a new Flexible Lifetime ISA, as announced in today’s Budget.
Anybody under 40 will benefit from the introduction of a new flexible Lifetime ISA where people can save up to £4,000 each year and receive a further 25% top-up from the Government. The fund can be used to go towards buying a first home or at retirement.
The latest research from Capita Employee Insight Report found that younger people in particular struggled with pensions terminology, with 55% of 16-34 year olds commenting that pensions-related terminology was complicated and confusing, and a barrier effective retirement planning. Furthermore, 48% of 16-34 year olds are put off from joining a pension due to the jargon. In addition, 33% of 16-34 year olds say they would rather use an ISA than a pension to save for retirement, with just 18% disagreeing.
Commenting on this, Robin Hames, head of marketing and research at Capita Employee Benefits said: “Younger people will welcome the introduction of the Lifetime ISA, but one of the big challenges will be how this new savings option will be communicated to people."
“Although auto-enrolment has been hugely effective in getting more people to save for retirement, younger people will now be presented with a new dilemma on how best to prepare for their future, and also whether future planning should be kicked into the long grass in favour of more immediate pressures.”
It may be unlikely that employees will be able to afford to contribute to both.
Younger people will effectively be given a straight choice – an auto-enrolment pension or an ISA. Whilst employers contribute to pensions on behalf of their employees, there are no rules currently in place to allow them to do the same with a Lifetime ISA. Are they aware that they will lose their employer contribution, for instance, if they cancel their pension and set up an ISA? We therefore risk younger people making a decision on which how they want to save, perhaps without all the necessary information in place to be able to do so. Worryingly, 40% of employees aged 16-34 turn to Google when they need information on finances and, as we know, this can be a very hit or miss experience.
This does present employers with a chance to help support young employees and it is clear from our own research that many young people feel their employer has a role to play, with 59% saying they feel their employer should provide them with access to financial education.
Robin added: “Communication is key and pension schemes and ISA providers will need to get their skates on to develop an effective online solution in good time for when the Lifetime ISA launches. A challenge with tight timescales, but in pensions, this is nothing new.”