RetireEasy calls for PensionWise to step in to prevent younger workers ditching their Workplace Pensions in favour of the new Lifetime ISA (LISA). Mark Soper explains

Unexpectedly, the 2016 Budget gave a massive boost to savers and investors with a big increase in the ISA allowance from April 2018 , the introduction of the new Lifetime ISA (LISA), a cut in Capital Gains Tax and future-proofed increases in the tax free personal allowance – all welcomed by RetireEasy as a goal to improve long-term savings. However, Mark Soper identifies an early concern if many younger and/or low paid workers with limited savings resources choose a LISA with its better access and tax-free withdrawals instead of joining a Workplace Pension Scheme – this will inevitably lead to a severe cut in an individual’s retirement pot.

Let’s look at an example.

Take a 30 year old who decides to save £100 per month for retirement into a new LISA. The Government will top this up by £25.00 per month until age 50 and at age 60 these savings assuming growth at 4% p.a. will have grown to provide a tax-free retirement pot £68,350 (just under £38,000 in today’s terms assuming an inflation rate of 2% p.a. throughout).

If the same money had been invested in a Personal/Workplace pension only 25% of the pot could be taken tax free with the remaining pot potentially subject to income tax – depending on the individual’s other income in place at age 60. Assuming the remaining pot is fully taxed at 20%, it will reduce to £58,000, around £10,000 less than the LISA pot. However, under a Workplace Pension Plan, the employer must also contribute and a contribution averaging £18.00 per month over the next 20 years would be enough to make good the shortfall – even less if the individual works through to age 60.

Employees with earnings around £15,000 p.a. or more will receive at least this level of contribution from their employer over the next 20 years so our message is:

”Don’t give up your Workplace Pension for LISA”

Read more articles from our in house experts at www.retireeasy.co.uk