George Osborne’s 8th Budget was presented as a ‘budget for the next generation’ acknowledging the hopeless situation too many young people find themselves in: struggling to find work, or being in work but struggling to earn enough to cover the daily costs of living. For these young people saving for a home is a priority that often feels like an unattainable ambition, so finding some spare money to put into a pension becomes an almost laughable pipe dream.
The Lifetime ISA was today announced as a significant solution to this problem. Open to the under 40s the Lifetime ISA allows individuals to save up to £4000 a year until the age of 50 with government putting in £1 for every £4 saved. Money put into this account can be saved until you are over 60 and used as retirement income, or you can withdraw it to help buy your first home.
At first glance this is a generous deal and demonstrates that the Government is addressing the serious decline in home ownership and the lack of incentives available to younger people to build up a nest egg. However the problem with the Lifetime ISA is its (we assume) potential unintended consequence of undermining confidence in pensions saving.
There is a very real danger that any current or planned private pensions saving will be diverted into the LISA because of the straightforward fact that a home of your own feels far more of a priority than a hypothetical income at some unknown date in your 60s and 70s. Contributions to workplace pensions through auto-enrolment will also be at serious risk if people prioritise saving into a LISA thus losing valuable employer contributions as well as the longer term investment into a workplace pension.
Whilst the Chancellor noted that pensioner poverty had fallen since 2010, this general downward trend has stalled and the numbers of pensioners living in poverty have stuck stubbornly at around 1.6 million in recent years. Age UK’s raison d’etre is to fight for the best for future as well as current pensioners and so we are concerned about the long term impact of this policy.
The Chancellor must ensure that his legacy doesn’t include rising numbers of pensioners living in poverty and that the opportunity cost of the new Lifetime ISA is another signal of the long term demise of pensions.