ISAs 

Lifetime Isa better for low earning millennials than pension

Lifetime Isa better for low earning millennials than pension

Most millennials who are basic rate taxpayers while working and in retirement, will get a larger retirement income from a Lifetime Isa than a pension pot, according to Michael Johnson, independent research fellow at the Centre for Policy Studies.

Mr Johnson said that for most under-40s, the Lisa will produce a larger return in retirement than a pension due to the government bonus and suggested that a workplace Isa may work better for a younger workforce.

His analysis found millennials - those aged between 18 and 40 - have to face unaffordable housing, student debts, zero hours contracts and increases to state pension age so were unlikely to be able to save a lot, or were not yet interested in saving for retirement. 

Individuals receive a 25 per cent bonus on post-tax contributions with a Lisa, whereas basic rate taxpayers receive 20 per cent tax relief on pension contributions. 

Analysis by Mr Johnson showed someone who paid the basic rate of 20 per cent in income tax, both when working and subsequently in retirement, would have to contribute a post-tax £80 to a Lisa but £94.10 to a pension scheme to receive a post-tax £100 in retirement.

He argued that offering a workplace Isa as well as a pension fund could be complementary, especially for higher earners, as they both have aspects to them which makes them desirable for savers.

Chris Connelly, propositions & solutions director at Equiniti, said: “Innovation within the retirement savings industry, especially when looking to increase engagement with younger cohorts of savers, is a good thing.

“Invention in the financial services industry such as open banking has revolutionised how we view our finances and with pension dashboards on their way, there seems little reason why both products couldn’t co-exist in the workplace to provide greater choice for employees, whilst still giving them the accessibility to see the whole of their benefits and the tools to manage them.”

The fact that individuals can access their savings in a Lisa at any age (from one year after the first subscription) appeals more to younger savers. Also from the age of 60 funds can be accessed with no penalty and pre-60 access is penalty free if the money is going to be used to purchase a first home up to the value of £450,000.

However, pension savings cannot be accessed until the age of 55, except on the grounds of serious ill health.  

A pension pot would be better suited for people looking to save more as Lisa contributions are restricted to £4,000 per year until the age of 50, but pensions’ tax relief annual allowance is £40,000, explains Johnson. 

But, since millennials are unlikely to be able to afford to save more than £4,000 in a year the Lisa limit did not appear to be an issue and those who can save more should choose to save into a pension scheme.

Pension schemes’ inaccessibility also appeals to people who do not want to be able to touch their savings until they reach retirement.