Research by provider Zurich has suggested people who reject workplace pensions in favour of the new Lifetime Isa could see their retirement pots shrink by more than a third.
The firm’s analysis found a Lifetime Isa - plans for which were announced in the March Budget this year - could lead to a total savings pot a third smaller than a workplace pension, based on projections in a comparative calculation over 35 years.
In late March this year, an inquiry into auto-enrolment by the Work and Pensions Committee re-opened to consider new evidence on whether the Lifetime Isa could undermine workplace pensions.
Zurich has warned the Lifetime Isa could encourage savers to opt out of workplace schemes, missing out on tens of thousands of pounds in employer pension contributions.
As of April 2017, individuals under 40 will be able to save up to £4,000 a year into the new Lifetime Isa until they reach 50, and for every £4 they save, the government will add a £1 top-up.
According to Zurich’s analysis, a basic rate taxpayer aged 25 who saved £60 a month into a Lifetime Isa could build up a retirement pot of £24,971 by the age of 60.
However, the same individual saving into a pension under auto-enrolment would see their pot grow to £37,144, according to Zurich, assuming the 3 per cent employer contribution comes into effect from 2019.
Martin Palmer, Zurich’s head of corporate funds propositions, said: “A typical basic-rate taxpayer saving £60 a month over 35 years would be more than £12,000 worse off in a Lifetime Isa than a pension.
“The risk is young people could reject workplace schemes in favour of the Lifetime Isa, giving up tens of thousands of pounds in employer contributions without even knowing it.
“There is a real danger that the Lifetime Isa could derail auto-enrolment and reverse the progress in encouraging people to put money aside for later life.”
Mr Palmer said savers could see an even bigger fall in their final pension fund if they invest in a cash rather than stocks and shares Lifetime Isa.
“A cash Lifetime Isa might not be a problem for someone intending to buy a house in five or 10 years, but with interest rates so low, it would be a major concern for anyone invested for 30 or 40 years. As a result the difference between what a Lifetime Isa eventually pays out and a pension could be even greater.”
Additionally, higher rate taxpayers who become basic rate taxpayers in retirement would also be better off saving into a pension.
A higher rate taxpayer saving £60 a month over 35 years would end up with a pension of £21,225, compared to just £18,728 in a Lifetime Isa even without an employer top-up.
Other providers conducting research into the same topic are finding slightly different results.
Standard Life has done some early stage qualitative research with young people, dividing people into three groups: school leaver age, early twenties and thirty to forty year olds.