The upcoming launch of the Lifetime ISA next April could impact employers more than you think. A plethora of recent surveys and reports from consultants, suppliers and industry bodies shows the likely popularity of these new savings vehicles – even greater than what the government has predicted. Indeed, over 60% of workers aged under 40 are expected to open a LISA once they become available.
The effect of LISAs on workplace pensions and other saving schemes in the reward package is inevitable: with the promise of a government bonus, greater flexibility and the potential use for buying a new home, employers must consider the likelihood of employees re-directing their savings from pensions or even opting out of them altogether. This is especially the case where employees have finite resources, so what they pay into a new product like a LISA will be a re-allocation of funds rather than an increase in overall savings.
Does this really matter? It does if employees make unwise decisions and find themselves financially worse off; responsible employers should be concerned about this. Furthermore, an exodus from employer-sponsored pension funds could affect the financial viability of these schemes, so employers have an interest in ensuring their company schemes are well supported.
HR reward teams are well placed to support employees in considering the options and making sound decisions. Let’s not underestimate the complexity of choices many employees will face. On the surface, the concept of a LISA is a simple one, but when employees must choose between saving into a pension or a LISA and base their decision on the interaction of national insurance and income tax rates, the benefit of either is likely to be lost.
Employers may want to consider what their communication strategy should be. This doesn’t mean giving personal advice to each employee; there are other effective approaches such as tailored messaging to different sections of the workforce, or incorporating LISAs into an existing communication platform for workplace savings.
In considering their communication strategy, it is worth employers reflecting what it is about LISAs that makes them potentially so attractive to their target market.
- They are saving for a clear purpose that everyone can recognise the value of. It is not some nebulous concept of putting money aside for old age,
- They are simple – you get a 25% Government bonus: a concept much easier to understand than tax relief and possibly salary sacrifice, and
- They don’t use a 28-page explanatory booklet to get all this across. Indeed, the government sums up pretty much all you need to know in a single graphic friendly page.
There is much employers should learn from this when communicating about pensions. If not, the pensions options will be at a disadvantage, and making a fair comparison between the choices employees have will become even harder.
Additionally, employers may want to consider offering LISAs as part of their future reward package, given the likely popularity of these benefits. The added reassurance of employer governance and guidance would make them an even more robust and attractive savings vehicle.