The introduction of a flexible new savings product for younger workers sounds superficially attractive but opens up a baffling range of options and the risk of making damaging choices.
In recent years millions of people in their 20s and 30s have been automatically enrolled into a workplace pension, benefiting from an employer contribution, tax relief at their marginal income tax rate and the chance to build up a tax free lump sum. More than nine out of ten people in their twenties have stayed in pensions rather than opting out, but this progress risks being undermined by the new lifetime Isa option.
While a flexible savings vehicle looks attractive for young people, if they choose this instead of a pension, they will lose their employer contribution and the chance to access their cash at 55. Furthermore, any money they take out of the Isa is subject to a hefty 5 per cent exit penalty which could leave them further out of pocket.
There is already a ‘help-to-buy’ Isa which the Treasury says can run alongside the new lifetime Isa, while low income workers can also now take part in a separate ‘help-to-save’ scheme with another different set of rules and limits. Given that relatively few young workers have access to financial advice there is a real risk of them making poor decisions and getting bad outcomes, all because the chancellor wanted a shiny new initiative to announce in his Budget.
Chancellors always talk about making things simpler for people but this is yet another layer of complexity. All of the different options open to younger savers have different tax treatments, different contributions from the government and different rules on access.
Far from setting people free with their own money as now happens at retirement, the savings market was just surrounded with whole new tiers of red tape and complexity. Savings for retirement are treated differently to savings for a house to short-term savings. It should not be necessary to be a financial expert in order to decide how best to use your savings.