ISAs 

Millennials likely to misuse Lifetime Isa: report

Millennials likely to misuse Lifetime Isa: report

Fears the Lifetime Isa will undermine pensions may be founded, after it emerged one in five millennials is considering opting out of auto-enrolment to set up a Lisa.

Research by fintech firm Dunstan Thomas revealed a very high level of interest about the Lisa among people in their 20s early 30s, but also a lack of understanding about how the product works.

A third of the 1,000 millennials surveyed said they intended to take out a Lisa when the product is launched in April, while 25 per cent said they would use is as a retirement product.

The 23- to 36-year-olds were confused about the tax implications of a Lisas versus a pension, with 36 per cent saying they didn't know which wrapper was more tax efficient.

Twenty-seven per cent, meanwhile, thought the Lifetime Isa was the more tax efficient vehicle. 

The Lisa provides a 25 per cent bonus up to £4,000 a year (after tax). Savers could then draw down on it tax-free in retirement. 

Pension contributions, meanwhile, are tax exempt, meaning the value of the tax relief depends upon the individual's tax bracket. They then are taxed at the marginal rate when withdrawn in retirement.

However, unlike the Lisa, auto-enrolment contributions include an employer contribution - currently 1 per cent, but set to go up to 3 per cent of a band of earnings by 2019 - meaning the value of a workplace pension is not just in the tax relief.

Adrian Boulding, director of retirement strategy at Dunstan Thomas, said the results showed there was "a clear danger" of the millennial generation buying 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," he said.

"But our findings indicate awareness of the product amongst the target audience is low and they may well decide to use the Lisa to save, apparently more flexibly, for retirement.

"And having done this, they may even 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 research also revealed that saving for retirement did not figure high on millennials' list of saving priorities, coming fourth below saving for a "rainy day savings fund", a "nice holiday", and a home.

Despite this lack of interest in building a retirement pot, the majority (well over 80 per cent) of millennials were confident they would retire with a sizeable pension.

However, older millennials were marginally less optimistic about this (82 per cent among those in their 30s versus 86 per cent among those in their 20s).

Alan Chan, a financial planner and director of IFS Wealth & Pensions, said while he supported the Lisa, it was important that it not be allowed to shift the focus away from pensions.