MPs to look into likely effect of lifetime ISAs on auto-enrolment regime

From April 2017, adults under 40 will be able to save up to £4,000 each year towards the purchase of their first home or for their retirement into a lifetime ISA, and will receive a 25% bonus from the government when the money is withdrawn for one of these purposes.

The Work and Pensions Committee said that it had decided to re-open its inquiry into pensions auto-enrolment after stakeholders said the introduction of the lifetime ISA (LISA) could spur retirement savers to opt-out of workplace auto enrolment pension schemes. It said it might not always be in savers' best interests to do so.

"Stakeholders have raised concerns that the LISA could undermine pensions auto-enrolment as people may choose to opt-out and save in the LISA instead of their employer pension," the Committee said. "People may also not understand where their money would be better off, or the benefits of employer contributions."

The Committee has asked stakeholders to send it written submissions outlining their views on the extent to which they believe the lifetime ISA and auto-enrolment regime are "compatible" with one another and with "the government’s wider pension strategy". It said it is interested in hearing views on what the likely impact the lifetime ISA's introduction will have on auto enrolment opt-out rates.

Among the other submissions the Committee is keen to obtain is on whether certain groups of society would be better or worse off from saving into a lifetime ISA than participating in a workplace auto-enrolment scheme.

Auto-enrolment began for the largest employers on 1 October 2012, and 'staging dates' by which smaller companies will have to begin the process run until 2018. Under the programme, employers will have a legal duty to automatically enrol workers into a pension scheme which meets certain minimum requirements, and will be legally obliged to make contributions towards the pensions of those that do not opt out of the scheme.

The current minimum contribution is 2% of earnings, of which 1% must come from the employer; and is due to rise to 8%, of which 3% must come from the employer, by April 2019.

"Auto-enrolment has been working well so far," pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said. "More than six million workers have been auto-enrolled into a workplace pension so far.  The introduction of the lifetime ISA complicates the picture for employers and savers alike. How do workers decide how much to save in either or both of these retirement saving vehicles? To what extent should employers make a lifetime ISA available to their staff on their employee benefits platform? These decisions aren’t at all easy." 

"The way workplace pensions and lifetime ISAs are taxed is quite different, and only savings in workplace pensions benefit from employer contributions. There is a risk that some workers who have been auto-enrolled may decide to opt out of their workplace pension in order to invest instead in the more flexible lifetime ISA. This may not be in their best interest. There is plenty here for the Work and Pensions Committee to debate. Employers and workers will need help to make the right decisions," Tyler said.