Low awareness of LISAs amongst Millennials sets up danger of miss-buying, finds new study commissioned by Dunstan Thomas.
Millennials rely on ‘Bank of Mum & Dad’ for nearly a quarter of deposits on first home purchase nationally, in London ‘parental dependency’ stands at over 30%**
Miss-buying risk.A combination of lack of understanding of the Lifetime ISA (LISA) and the fact that first home purchase is not top of Millennials’ list of savings priorities, could lead to widespread miss-buying or miss-selling of LISAs by the target group, according to a nationwide study conducted in December by Opinium Research for financial services technology business Dunstan Thomas. A third (32%) of Millennials questioned said they are likely to take out a LISA from this April. Erroneously, 27% thought that the LISA may be a more tax efficient retirement savings vehicle than an Auto-Enrolled workplace pension.
Low awareness of LISA amongst target audience.The survey which was completed by a thousand Millennials aged 23-36 years old, found that 50% of this generation had no awareness of the LISA or had ‘heard of it but did know what it was for’ prior to being questioned. The Government’s new targeted savings product, first announced in the 2016 Budget and due to go live in less than three months’ time on 6th April 2017, is designed to support people under the age of 40 to save up for a deposit on their first home by giving them a 25% annual government bonus on all funds put into a LISA, up to £4,000 total contribution each year.
But there are catches which, given levels of awareness and Millennials’ real savings priorities uncovered by this survey, will worry the regulator and advisers alike. Firstly, after the first year of holding a LISA, anyone withdrawing funds for any reason, other than providing a deposit for your first home, suffering a terminal illness or reaching retirement age will pay a 6.25% penalty for so doing.
Take the example of an individual who invests £800 in a LISA, so receiving a £200 government bonus. Early withdrawal will generate a charge of 25% of total funds, which is £1,000 in this instance, so that they will only have £750 left to transfer out – creating a savings loss of 6.25%.
Saving for deposit on 1st home less important than holiday fund.However, Millennials’ savings habits suggest savings for a deposit on their new home is not a top savings priority. Top of the list of reasons to set money aside, cited by 38% of Millennials who currently save, is to build ‘a rainy-day savings fund’, perhaps to combat redundancy or pay for major car repairs. Their second priority is saving for a holiday, for 29% of young savers. While saving for a deposit on their first home comes in third – rated by only a quarter (26%) of saving Millennials. While 16% are prioritising saving up for large household items and 12% are saving for a new car.
This leaves very little left over for long-term saving for retirement: just one fifth (19%) of Millennials’ who save are doing so specifically for retirement to top up an existing pension scheme. Millennials working full-time save on average £191.33 per month. £161.65 per month is put aside by Millennials across all socio-economic groups. Those working part-time (up to 29 hours per week) set aside an average of £87.42 each month.
Savings levels regionally.Indicative findings* suggest that the average Millennial living in Northern Ireland saves the least of all UK regions – just £58.32 per month, whilst in Wales they set aside £91.34 in a typical month. However, Londoners’ savings pots are the most bountiful with £208.52 being set aside each month.
Reliance on Bank of Mum & Dad for deposit on 1st home rises with house prices.The reliance on the ‘Bank of Mum and Dad’ is more accentuated the further south you travel into areas where housing is generally more expensive. So, in the Southeast 28.4% of deposits on first home purchase by millennials comes from parent’s or partner’s parents savings or inheritances, and in London that percentage is even higher at 30.23%, whereas in Yorkshire and Humberside 22.2% of deposits come from the Bank of Mum & Dad, Scotland it is lower still at 15.7% and in Northern Ireland it’s 14.6%. The average Bank of Mum & Dad dependency for getting onto the housing ladder across the UK is now 23.7%.
Over half of younger millennials are unrealistic about when they will be able to afford first home.Nine in every 10 (86%) 23-29 year olds in the UK who don’t already own a home but plan to, think they will be taking delivery of the keys to their first home by the time they are 40. More realistically, 64% of older Millennials within this group (aged 30-36 year) think they will be able to afford their first home by age 40.
Unfortunately all millennials questioned are over-optimistic as, according to the Institute of Fiscal Studies (IFS) study of the economic circumstances of different generations, only 40% of young people born in the 1980s (aged 28-37 today) own their own place today. The Dunstan Thomas Millennials Study found that 36% of this total sample (up to age 36) were home owners, putting home ownership by this sample in line with the IFS’ findings.
LISA creates retirement saving option confusion.LISA savings can also be accumulated for retirement purposes, and can be withdrawn from age 60 for that purpose. But here too there are catches. For example, you are not allowed to continue to add to your LISA-held retirement pot after the age of 50 - often exactly the age when you are finally able to start accumulating additional savings for retirement. In addition, in a LISA you do not get access to key benefit of a workplace pension scheme including your employer’s contribution which could well double your saving pot. Again, awareness of the relative merits of Automatic Enrolment workplace pension scheme versus LISA saving, were not well understood by the nationally representative group, the Dunstan Thomas survey found.
A quarter (25%) of Millennials indicated that they might take out a LISA as a retirement savings product and 27% even thought that LISAs would be a more tax efficient retirement savings vehicle than a workplace pension. A further 38% simply did not know which product would be a more tax efficient long-term savings product, suggesting that two-thirds (66%) of the sample are either ill- or miss-informed in this area. The scope for miss-buying or miss-selling looks significant given these numbers.
Unreliable savings habits of 30-somethings as wallet pressure grows.Again, older Millennials are struggling with their savings habits as pressure on their wallets increases in their 30s: 40% of 30-36 year olds are either saving irregularly or not at all; while 35% of 23-29 year olds are failing to put some cash away regularly.
Some 39% of older Millennials (aged 30-36) and 27% of younger Millennials (aged 23-29), said that they were unlikely to buy a LISA. The net LISA-rejection rate across all Millennials questioned stood at a third (33%).
Auto-Enrolment opt outs set to rise to 20%.20% of Millennials said that they would probably opt out of an auto-enrolment workplace pension (nearly twice the current opt out rate), when given the option. Many SME & micro- businesses hit their staging date this year.
Four-fifths (82%) of 30-36 year olds who plan to build a retirement pot think they will have built a sizeable retirement pot by the age of 65, whereas younger Millennials aged 23-29 are again more optimistic: 86% thinking they will have addressed this need by the current state retirement age of 65. Less than one fifth of Millennials who are currently saving (19%) are consciously doing any retirement saving right now above and beyond a specified pension scheme.
Adrian Boulding, Director of Retirement Strategy at Dunstan Thomas, explained: “Our Millennials Study results show that there is clear danger of the Millennial generation buying the LISA for the wrong reasons. To those of us in the industry it might look like a highly flexible savings vehicle geared to one of their financial goals – getting on the housing ladder. But our findings indicate awareness of the product amongst the target audience is low and they may well decide they want to dip into their LISA to fund a period between jobs or even a big holiday, only to find they’ve lost out.
“Worse, they could see the LISA as their way to save for retirement and consequently opt out of their workplace pension scheme which is, in the main, a much better way to save for retirement than a LISA because pensions enjoy matching employer contributions.”
The Dunstan Thomas survey also probes preferred capabilities and functionality that Millennials would most like to see in new smart phone-ready, highly interactive apps which Dunstan Thomas is developing for product providers. The next generation of customer engagement tools will help consumers make better financial choices engendering healthier saving habits, while enabling providers to understand and engage more deeply with their customer-base.
* This finding is indicative because the sample size for this question in regions specified was under 50 people.
** The research contains a regional breakdown of reliance of ‘Bank of Mum & Dad’, based on estimated or actual (if already purchased their first home) percentage of deposit paid for first home by the following sources: parents’ savings, partner’s parents’ savings, inheritance, partner’s inheritance. The split is as follows is order of level of dependency on Bank of Mum and Dad:
1. London – 30.23% comes from the ‘Bank of Mum & Dad’
2. Southeast – 28.39%
3. Wales – 26.88%
4. East of England – 24.79%
5. Southwest –23.51%
6. East Midlands – 23.5%
7. Northeast – 22.52%
8. Yorks & Humber – 22.22%
9. West Midlands – 21.10%
10. Northwest – 21.97%
11. Scotland – 15.66%
12. Northern Ireland – 14.62%