What effect will the new Lifetime Isa (LISA) have on Auto Enrolment?

From April 2017 anyone under the age of 40 will be able to open a Lifetime ISA and save up to £4,000 each year. As an incentive the government will add an extra 25% top up. So if you use your full £4,000 allowance, the government will generously add a further £1,000 into the pot.

Savers will continue to receive the government bonus on annual savings up until the age of 50. After 50 they can continue to save but without the 25% incentive.

The Lifetime Isa is a very attractive pot for pension saving. Initially savings can be used towards a deposit on a first home worth up to £450,000, any remaining money left in the pot until the age of 60 can be taken tax free, very appealing!

But what effect will LISA have on auto enrolment?

The appeal of getting a foot on the housing ladder may encourage more under 40’s to opt out of Auto Enrolment altogether in favour of a lifetime ISA. This has led to the opening of an inquiry by the Work and Pensions Committee to assess the long term effect LISA will have on auto enrolment.

Ideally saving in both a Lifetime Isa and your workplace pension will boost retirement savings but as auto enrolment filters down to the small business owners there is concern that employers may encourage workers to opt out of a workplace pension in favour of a LISA. This would effectively mean that thousands of employers could potentially dodge worker pension contributions leaving thousands of workers missing out on employer contributions into their pension.

It will be interesting to see how the new Lifetime Isa beds down. Could it eventually be included in auto enrolment, or will it pave the way to a future move to pension Isa’s, replacing traditional pensions altogether.

If you have any concerns regarding auto enrolment contact a member of our payroll team on 0161 767 1213.