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The Lifetime ISA comes alive

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By John Cockerton and Mark French | April 26, 2017

The Lifetime ISA comes alive – we take a closer look at what impact this product could have for employers alongside their current benefits package.

Following the launch of the Lifetime ISA in April this year, our resident expert John Cockerton takes a look at how employers might benefit from offering a Lifetime ISA and how it could complement and add value to a competitive benefits package. We also consider the current Lifetime ISA marketplace with the help of Mark French, a member of our dedicated corporate savings research team.

In this article, our authors will draw together in-depth research carried out by Willis Towers Watson to explore the birth of the Lifetime ISA: what it means for employers, providers and employees.

The employer perspective

So you may be reading this thinking, 'why do I need to bother with a Lifetime ISA; life is already complex enough isn’t it?' That may be indeed true for some employers but not for all.

Recent research carried out by Willis Towers Watson on the ‘Savings Psyche of the UK’ shows that over half of employees believe that the Lifetime ISA is more appealing when compared with traditional pension schemes. Furthermore, two-thirds of employees want flexibility in their pension saving options (i.e. save for other financial needs).

Why is this? Over the last few years, we have seen a dramatic change in the world in which we live. General constraint on salary levels combined with a rapid increase in property values has led to a change in financial demands for many employees. This has occurred at a time when life expectancy has been rising, with the result that retirement ages have increased (both in the State Pension and in many private sector schemes). So retirement looks even more remote for many.

Our 2015/16 Global Benefits Attitudes Survey UK shows that for the under 40s saving for housing is much more important than saving for retirement. Indeed saving for retirement doesn’t even feature until the 40s when it takes fourth place. Only the 50s-plus prioritise retirement savings as shown in Figure 1.

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Figure 1. Saving for retirement is a top financial priority for those over 50

Towers Watson Media

So why does this matter to you as an employer? It comes back to why you provide a pension scheme in the first place. Assuming you provide something better than you are required to by law, the two main drivers for doing so are, we believe:

  • To be an attractive employer in the competitive employment marketplace 
  • To enable employees to address all their financial needs (including retirement savings) and retire at a suitable age in the future

Based on the above research, you could take the view that you as an employer need to change the under 50s’ view of traditional retirement savings. That will take a lot of education, effort and cost. Worst of all it is probably not a very attractive message (to the under 50s who are tomorrow's senior talent) when many employees are struggling with housing costs. It is unlikely to help your attractiveness as an employer and be seen as an employer of choice to the under 40s.

So what is the alternative? We think the solution is to find something that does two things:

  • Provide a savings solution that is more attractive than pension for many employees 
  • Help employees struggling with their housing costs, address those issues so that they can refocus as soon as they possibly can on retirement savings

That is exactly where the Lifetime ISA fits in. We believe by offering a Lifetime ISA alongside a traditional pension an employer can become more attractive to its employees (particularly the under 40s). Not only can it help employees address their housing needs sooner but it enables them to refocus on their retirement savings.

Our survey, ‘2016 UK Budget – How will workplace savings evolve around the Lifetime ISA?’, shows that employers are starting to embrace the financial challenges; of those that responded to the survey:

  • About 70% will offer a Lifetime ISA within the next five years.
  • About 50% will also allow employees to exchange pension contributions for other savings.
Figure 2. How likely is it that your organisation will provide access to a Corporate ISA or Lifetime ISA in the next five years?

Towers Watson Media

Figure 3. Does your organisation provide employees with the opportunity to exchange their pension contributions for cash or other benefits?

Towers Watson Media

So now you are convinced you need to introduce a Lifetime ISA – how will you go about it?

The Lifetime ISA provider market

Selecting the right provider for your Lifetime ISA is important and you will want to secure the best available for your employees to ensure it is smooth running and competitive. This means that having a reasonable choice of providers to select from is essential.

Many established Corporate ISA providers have told us they have been keeping a watching brief rather than rushing to make a Lifetime ISA product available for 6 April 2017. This was exacerbated by the pace at which the Government was making available the details on how the product should work.

What does this mean for choice? Our research shows that it is not so much of a question of whether these providers will offer a Lifetime ISA, but rather it is when. Most of the providers that offer Corporate ISA arrangements have committed to launching a product within the 2017/2018 tax year and, although choice might be very limited from 6 April 2017, we expect that employers will be able to obtain a Lifetime ISA product from a healthy number of established corporate savings providers towards the latter stages of 2017. The supply chain is likely to be extended further by new entrants from the group pensions provider market, the adviser market and the retail ISA sector seeking to broaden distribution through the workplace.

Provider Already offers Corporate ISA Expects to launch Lifetime ISA in 2017/18 tax year Considering offering Lifetime ISA but no current plans to launch
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In summary, we expect there to be a reasonable number of Lifetime ISA providers to select from towards the end of this year, but expect lots of variation in the quality of the products offered and the range of administration and fund charges available as the Lifetime ISA marketplace establishes.

Conclusion

Minh Tran, Head of Wealth Consulting at Willis Towers Watson, notes, "Employees’ different financial needs are currently not being met by the typical fixed benefits package of pensions, health, risk and voluntary benefits. Organisations are increasingly looking at innovative ways of increasing employees’ financial wellness and appreciation, and to remain an employer of choice, without increasing overall benefit costs. The arrival of the Lifetime ISA in conjunction with the auto-enrolment minimum contribution increases in 2018 and 2019 is providing organisations with plenty of food for thought to modernise benefit programs. This will help employees address short-, medium- and long-term financial needs, in addition to the traditional retirement savings."

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