Majority of Lifetime ISA savers plan to use money for retirement

Nearly a third (30%) of people aged between 18 and 39 plan to save in both a workplace pension and Lifetime ISA when the Lifetime ISA launches next year, new research has revealed.

According to workplace pension provider NOW: Pensions, 16% of 18 to 39-year-olds said they will continue to save into a workplace pension and not open a Lifetime ISA, while 9% said they will stop saving into a workplace pension and put their savings into a Lifetime ISA. One in 10 (11%) said they don’t intend to save into either and 19% said they don’t know what they will do.

Of those that plan to open a Lifetime ISA, over a third (38%) plan to use the money saved for their retirement, one in five (21%) plan to use it for buying their first home while 18% say they’ll use if for both.

Morten Nilsson, chief executive of NOW: Pensions, said: “For young savers, the Lifetime ISA is going to be very tempting. It can be used to buy a first house, and that comes ahead of retirement sequentially and we know that behaviourally people place a higher value on nearer term events. This might result in an increase in auto enrolment opt outs.

“But, savers shouldn’t be too hasty to turn their backs on workplace pensions. Over a lifetime of saving, a workplace pension offers better value largely as a result of the employer contribution. If a saver put £20 a month into a workplace pension versus £20 a month into a Lifetime ISA, by the end of the year they would have around £600 in their pension versus £300 in the Lifetime ISA.”

For those that plan to continue to save in a workplace pension, the biggest incentive is the employer contribution with 62% stating that they wouldn’t want to miss out on this. Over a quarter (27%) say they prefer having their money locked away until retirement without the option to access it early. One in 10 (10%) believe pension saving is more tax efficient.

A large proportion (41%) of those surveyed said that if they had the option, they would like to be able to put their employer’s pension contribution into their Lifetime ISA, while 21% wouldn’t want to do this.

Nilsson said: “With pension saving, savers benefit from tax relief up front, receive 25% of their pension pot tax free and then only pay tax in retirement if they have an income high enough to be taxable. For some, this will be preferable to paying tax up front with an uncertain promise of not paying tax on withdrawal.”

Chancellor George Osborne announced the Lifetime ISA in his Budget speech.

Under the new scheme, anyone younger than 40 to will be able to put away up to £4,000 a year until they are 50. For every £4 people save, the government will give them back £1, a bonus of up to £1,000 a year.

Osborne said that it will allow people to save for a new home or retirement. It will be launched in April next year and those with a Help to Buy Isa will be able to transfer their funds into it. Alternatively, you can continue saving in both, but you will only be able to use the bonus from one to buy a house. The Help to Buy ISA is due to end in 2019.

The savings and the bonus can be used towards a deposit on a first home worth up to £450,000. Accounts are limited to one per person, so two first-time buyers can both pair up and double their bonus.

The current ISA limit will also go up next year from £15,240 to £20,000.