LISA offers potential to get more under 40 years’ olds saving but it also increases emphasis on getting communications right
7 November 2016
Comment from Adrian Boulding, Head of Retirement Strategy at Dunstan Thomas
Things are moving on rapidly for the Lifetime Individual Savings Account (LISA). The Savings (Government Contributions) Bill is progressing through Parliament. Following its second reading, it is now sitting with the Public Bill Committee which can receive written evidence from the industry and general public until 5PM on 1st November. The committee met to discuss this bill for the first-time in the last few days. During the session politicians took the opportunity to grill the industry on how the product will be sold and marketed.
Meanwhile HMRC have produced its draft technical regulations on how the detailed arrangements for the 25% annual bonus payment will work and Government estimates of take-up have been fine-tuned in the Impact Assessment that accompanies the Bill itself.
These new HMRC and HMT take-up estimates leave us with no doubt that that Theresa May’s Government believe they have inherited a success story in LISA from the Osborne regime. Despite the warnings given to the Public Bill Committee that some providers will not be ready for launch because of the very short timescales, the Government is expecting 200,000 people will open a LISA in the 2017/18 tax year, saving on average £3,500 each that first year it is available. By 2020/21 they forecast that 800,000 people will be contributing to a LISA.
This impact will be keenly felt by the Exchequer, who will be adding that valuable 25% bonus to these LISA accounts. They estimate that within four years Government will have paid out £830 million in bonuses. Total costs to HMRC of implementing the Lisa could be as high a £3.5m.
Two interesting numbers can be deduced from that cost of bonus projection. As the Government add 25p of bonus for every £1 saved, it tells us they are expecting funds under management in Lisa to have reached £4.25bn by April 2021, plus some investment growth, so maybe topping £5bn in total. Assuming a fund charge of 50bps on average, this suggests our industry could be enjoying additional annual revenues of £25m per year by then.
But the evidence from the Public Bill Committee suggests that this will not come without trial and tribulation. Setting aside the insults – “it’s a policy in search of a solution” and “the earlier witnesses were not very bright people”, a recurring theme was the two-horned nature of the beast. Some customers will save in LISA short-term for house purchase and others will save long-term for retirement as they can access savings without penalty from the age of 60.
Most witnesses agreed that these two objectives should have very different investment portfolios. So, asking the customer what they are saving for will be of paramount importance. Indeed, evidence from the British Bankers Association revealed that some of their members will only offer cash-based LISAs - ideal for short-term saving but overly conservative for long-term.
If the two key ‘lifetime’ events of first house purchase and retirement were the extent of LISA’s ambition, then it should be easy for salesmen to ask a binary question and allocate investments accordingly. However, as the Public Bill Committee discussed, there may be other lifetime events ahead. Particular mention was made of adding Critical Illness, Redundancy and a Second Home to the list of events on which the whole account, including the Government Bonus, can be withdrawn.
The term ‘second home’ is unfortunate. What policymakers really mean is ‘stepping up’ into a second home. The need of people, who bought a small flat as a first purchase, to step up to a family- sized home over time, as their accommodation needs increase may be catered for. Be assured, LISA bonuses won’t be helping to fund a holiday home or a buy to let investment.
Adding these further options in will mean that LISAs might be aiming at short, medium or long-term investment horizons, whilst simultaneously providing protection for disasters like redundancy or ill health that can strike without warning. This will challenge both the investment professionals in picking appropriate funds and the communication teams in finding suitable ways to illustrate the likely progress of savings over time.
So, is this complexity or is it flexibility? Is one man’s flexibility another man’s complexity? It is certainly a brave effort by Government to create one new regime that will enable young people under 40 to combine a range of savings goals into one product. It will be a considerable achievement if we can do this. And because life never works out quite as we plan, it gives the consumer the real flexibility to adjust their goals as they go along without having to change savings vehicles.
But there is a darker side to this, and it worries the opposition politicians, especially SNP who, ever since last year’s election, have taken on the role of harrying Government over any weaknesses in policy. The question is whether a LISA or a pension is the better way to save for retirement and whether LISA might be seen as a more flexible alternative to a pension. They ask: “Is there a serious risk the Lisa will be miss-sold?”
I believe the issue at stake is whether a customer saving for retirement should be in a LISA, a personal pension or a workplace pension. If LISA is put up against a Personal Pension for long-term saving, we quickly get into a discussion about marginal tax rates both now and at-retirement. The former is, or at least should be, a known quantity. However, the tax rate that will apply to the pension at retirement is of course unknown. Still, a sensible guess could be taken, or the LISA de-risks the situation as it will be tax free at-retirement.
But the bigger issue is the choice between LISA and workplace pension, for the latter brings with it an employer contribution for any worker aged over 22 and earning over £5,824 per year. Given that the Money Advice Service has recently found that 21 million adults - 40% of UK adults - have less than £500 in savings, it may be naive to claim these are complementary products. Amongst low income groups, LISA and workplace pensions will be competing for the same scarce resources that are available for saving. And even where people have been auto-enrolled, often their employer’s scheme offers higher tiers of contributions with an employer match that remain un-tapped by the employee.
This brings us back to communication as our greatest challenge. As an industry, we must continue to improve our customer communications and engagement - using technology to find new and better ways to get our messages across – particularly to the next generation of savers who are the ones that could be most helped by LISA. LISA highlights the fact that we must work harder as an industry to help customers to reach a clear view of what they are saving for. So, that by focusing on required outcomes, customers will be able to identify appropriate products and investment levels to deliver those outcomes.
Adrian Boulding is Director of Retirement Strategy at Dunstan Thomas