Yahoo Finance Millennials ‘better off’ getting their boss to back a Lifetime Isa than a pension
Nine out of 10 young savers would be better off investing in a Lifetime Isa (Lisa) rather than a pension, according to a former adviser to David Cameron.
Michael Johnson, research fellow of the Centre for Policy Studies, a right-wing think tank, argued that employers should offer staff the option of workplace Lisas.
Around 14 million “millennials”, roughly defined as those aged 18-40, live in Britain. Lisas, launched in 2017, are designed for this cohort. Over-18s can open one before they turn 40, to save for a first home or retirement. A 25pc government top-up is worth up to £33,000.
Mr Johnson found that, given their earning expectations and the government bonus, for most under-40s, the Lisa will produce a larger return in later life than a pension.
He said: “For the majority of millennials, the Lisa is better. The pensions industry knows this, and is terrified. The next generation of self-invested personal pension buyers, for example, is likely to be very thin.”
Specific financial difficulties facing those under 40, such as unaffordable housing, student debt, stagnant earnings, the death of gold-plated final salary pensions and a rising state pension age, mean nine in 10 will be basic-rate taxpayers both during work and in retirement, Mr Johnson’s analysis shows.
Pensioners taxed at the basic rate – currently 20pc on earnings below £50,000 – effectively pay 15pc on their pension income, if their 25pc tax-free lump sum is taken into account. By comparison, withdrawals from a Lisa are entirely tax-free.
Mr Johnson calculates that lifelong basic-rate taxpayers must effectively contribute £94.10 to a pension to access £100 post-tax income in later life. To get the same £100 from a Lisa, they would need to have saved £80.
Even 40pc income-tax payers can benefit, if they also pay higher-rate tax in retirement; for them, £100 of post-tax pension income requires saving £85.70, not the Lisa’s £80.
Mr Johnson’s research runs contrary to long-standing Government policy. Beginning in 2012, companies have been obliged to auto-enrol their staff into a work pension.
Ten million more workers now save this way. In February, Amber Rudd, the Work and Pensions Minister, called auto-enrolment “an extraordinary success”. Experts say the 8pc minimum contribution, which most savers stick to, is far too low. Mr Johnson said the problem is that pensions are seen as remote compared with Isas.
Savers can pay up to £4,000 a year into a Lisa until age 50, versus up to £40,000 into a pension. Few millennials will be able to breach the Lisa limit, however. Mr Johnson said: “Those who can are probably higher-rate taxpayers, in which case, they should opt for the pensions route.”
Lisa savers can access their money to buy a first home, for any reason at age 60, or if terminally ill. Pension money is available from age 55, due to rise to 57. Early Lisa withdrawals for any other reason trigger a 25pc charge.
Sarah Coles of Hargreaves Lansdown, a broker, said Mr Johnson’s argument works up to a point: “Where there are no employer contributions to your pension, say you are self-employed, and a 20pc taxpayer now and in retirement, you are probably better off with a Lisa.
“The game changer is the employer contribution you get with a workplace pension. The extra cash going in – and the growth on it – is likely to outweigh any tax you pay when you withdraw it. Here, a pension is better than a Lisa. Of course, best of all is to have both if you can.”
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laura.miller@telegraph.co.uk
