Flexibility in savings is key
Royal London’s Steve Webb recently said he would not be sad to see the back of the Lifetime ISA (LISA), describing it as a “confused product” because it tries to support both long and short-term investment tactics in its bid to help savers work towards buying a house and save for retirement. This opinion seems to be against the grain of public opinion. The Lifetime ISA is popular, particularly for younger employees who value its flexibility. It combines a 25% upfront bonus with ready access to savings (and bonuses) to help purchase the first home. Surveys indicate that home ownership is, for many of the under-40s, their top financial priority. Alternatively, savings (and bonuses) may be kept until retirement, when they become accessible entirely free of tax. Conversely, drawings from a pension pot are taxed at the marginal rate.
The Government now recognises the value of savings’ flexibility. Through NEST, it is now sponsoring an extension of the thinking that underlies the Lifetime ISA. Less than two months ago NEST launched its sidecar savings research trial, described by Matthew Blakstad1, NEST’s head of research, as follows:
“Rather than having a separate pension pot and emergency account, this hybrid approach combines the two. Doing so enables the flow of money to be managed in a smarter way that fits more naturally with people’s financial lives and preferences. The idea is that this approach will help to create a better balance of shorter and longer-term savings for each individual saver.
For workers, it’s also an easy and straightforward savings tool to use. A large part of this simplicity is thanks to the payroll mechanism that enables a regular flow of contributions to be split between the two pots. Once an individual has signed up and agreed to pay in an extra amount each month, on top of their normal auto enrolment contributions, the rest is done for them. So whilst they’re busy with work and home life, their emergency savings pot will be steadily building up so it’s there ready for them when they need it most. And, if they reach the savings cap, they’ll then start saving more for retirement.”
Flexibility is key. Last week the Financial Ombudsman Service ordered Sanlam Life & Pensions UK to compensate a client it believes was mis-sold a savings plan back in 1988. The plan was intended to meet a long-term savings objective and expected to reach its optimum performance after around 25 years. In summing up, the Ombudsman noted that a 25-year savings commitment was not likely to have been a "reasonable fit" for a 26-year-old who might need a degree of flexibility with their finances as circumstances changed.
Smarterly, the workplace savings platform, is now offering a payroll-deducted Lifetime ISA in support of employers’ financial wellbeing programmes. Employer contributions to a Lifetime ISA can be made on a “net pay” basis, attracting the 25% bonus which is paid irrespective of employees’ tax-paying status. With millennials predicted to make up 50% of the global workforce by 2020, and 75% by 2025, any assistance in helping them get on the property ladder is likely to be well received as part of a clear employee wellbeing strategy.