Lifetime ISA should be scrapped and self-employed should get pension auto-enrollment, MPs say
HARD-UP households need stronger action to help them deal with debts and save for a rainy day and a pension, MPs have urged.
The Treasury Committee also called for the Lifetime ISA to be scrapped due to its “perverse incentives and complexity”.
It also called for self-employed workers to get pension auto-enrollment, to help them save for retirement.
Lifetime Isas allows people to save for their first home or their pension in one pot.
But concerns have previously been raised that if people are saving for later life into a Lifetime Isa, it could discourage them from saving into a workplace pension, where they get the benefit of employer contributions into their pot.
Critics have also argued that a home and a pension are two very different savings goals.
Lifetime ISAs: Need to know
YOU can open a Lifetime Isa if you are between 18 and 39 to save towards your first home or for later life.me, or retirement. But there are a few catches
- You can pay in a maximum of £4,000 every year and earn a top-up from the Government of £1,000.
- The maximum bonus you could earn is £33,000 if you save until you are 50.
- Once you turn 50 you can no longer pay into your Lifetime ISA but your savings will still earn interest.
- You can only acess your money to buy your first home or when you reach 60, otherwise there’s a penalty.
- Any money you take out before you are 60 will be hit with a 25 per cent charge.
- When you’re 60 you can withdraw the money from your Lifetime ISA tax-free.
- Skipton Building Society is the only provider currently offering a cash Lifetime ISA.
- If you are willing to take investment risk, there are many providers offering the stocks and shares version including Nutmeg, Hargreaves Lansdown, The Share Centre, Moneybox, AJ Bell, OneFamily.
- Unless you are self-employed AND a basic rate tax payer, a pension is likely to be a better option for retirement saving than a Lifetime Isa because of the tax-breaks and the contribution from your employer.
The committee said: “This inquiry has received strong criticism of the Lifetime Isa over its complexity, its perverse incentives, its lack of complementarity with the pensions saving landscape and its apparent lack of popularity with the industry and pension savers.
“The Government should abolish it.”
The committee’s wide-ranging report said UK households are facing a series of challenges “that are putting the health and sustainability of their finances under pressure”, including pressures from weak income growth, the growth of the gig economy and self-employment and an ageing population.
It said the Government’s principal savings incentive takes the form of tax relief on interest, mainly through Isas.
The committee continued: “Yet there is little evidence that tax relief is an effective way of encouraging potentially vulnerable households to save for a rainy day.
“There is, however, more evidence that cash bonuses and direct matching schemes, such as the Help to Save scheme, are better at helping people build a precautionary savings buffer.
“The Government should update Parliament on the usage of such schemes and its efforts to increase take-up. It should also consider widening the eligibility criteria.”
Looking at people’s debt burdens, it said the debt collection practices of public authorities have been described as “worst in class”, with debts often pursued over-zealously and with routine recourse to bailiffs.
It said: “This approach risks driving the most financially vulnerable people into further difficulty.
“The public sector should raise its standards to the level of industry best practice.”
Should you use a Lifetime ISA for pension saving?
THE Lifetime Isa was introduced to encourage Brits to think about saving for their future.
Yet for most people, saving into a traditional pension plan is still the way to go.
Danny Cox, of Hargraves Lansdown, says: “When it comes to saving for retirement, a pension is almost always the number one choice, especially if you are in a company pension scheme, as your employer will also pays in.
“The exception is if you are self employed and a basic rate taxpayer, where a Lifetime ISA works well for retirement savings.
He adds: “Lifetime ISA savers should look to the stock market for long term retirement savings as this will provide a significantly bigger pot in the future than a cash Lifetime ISA.
“The cash Lifetime ISA is only really suitable for those planning to buy property in the short term of more than one but less than five years.”
Looking at pension saving, the committee highlighted a previous review which found there are still 12 million people in the UK who are not saving enough for their retirement. This is creating a “looming crisis”, it said.
It also highlighted growing concerns about self-employed people who have not been brought into workplace pension saving under automatic enrolment.
The committee said: “There is, therefore, an urgent need to bring the self-employed into the auto-enrolment system, but the Government has no clear strategy or timetable for doing so.
“The Government should consider making use of self-assessment and national insurance contributions to auto-enrol the self-employed.”
In the next Budget, the Treasury should report on the state of household finances, identify the key risks to the financial resilience of households, and set out its strategy for tackling them, the committee said.
Nicky Morgan, who chairs the Treasury Committee, said: “Many households are facing challenges that are putting pressure on the health and sustainability of their finances.
“Over-indebtedness, lack of rainy day savings and insufficient pension savings are some of the weaknesses in the household balance sheet identified in this inquiry.
“The committee’s report makes a series of recommendations for the Government to consider that would help households ensure that their finances are as resilient as possible.
“Whilst financial service regulators and guidance bodies have important roles to play, the Government should not pass the buck to them.”
Citizens Advice said it has seen a more than 25 per cent rise in bailiff problems since 2014 and helped 42,000 people with 98,000 issues last year.
Chief executive Gillian Guy said: “The Government must now show it’s taking the issue seriously.”
Am I on track for a comfortable pension?
If you are only putting in the minimum amount for your workplace pension then you are not saving enough for a comfortable pension. Here's how much you'll need according to consumer group Which?
- Which? reckon that you need to be saving £131 into your pension a month from age 20 to be able to have a comfortable pension
- Anyone over 30 would have to save up to £198 a month.
- If you start as late as 50 you need to be saving a staggering £633 a month to be able to have a £26,000 a year income when you retire.
- These figures are assuming that your employer pays his or her part of your pension contributions.
- You will also receive a state pension depending on how much national insurance you have paid over your working life, the maximum amount you can receive is £164.35 a week.
Helen Morrissey, pension specialist at Royal London said: “We have been concerned about the impact the Lifetime ISA could have on pension savings.
“There is a temptation that people would opt out of their workplace pension altogether as they prioritise saving for a house deposit in a Lisa.”
A Treasury spokesman said: “People deserve choice and freedom in how they save, and the Lifetime ISA does just that. It is an effective way to help people get on the housing ladder or save towards their retirement.
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“For every £100 saved, we give a generous £25 bonus, and so far, around £130 million worth of bonuses have been paid to 170,000 investors.”
A Local Government Association spokesman said: “Before councils use bailiffs, which should only ever be used as a last resort, people will have been encouraged to apply for monetary support and efforts will have been made to either attach the debt to a salary or arrange new payment plans.”
The report also called for the City watchdog to reconsider a cap across high cost credit.
According to a recent report from the Resolution Foundation, the poorest third of British households were left worse off by as much as £150 in 2017 to 2018.
Just under a third of the population or 19.2 million people and a quarter of families, 8.1 million, are on low to middle incomes.
Million rely on credit to plug gaps in their finances. Earlier this year, the financial regulator warned that debt levels in the UK are very close to their September 2008 peak – at the high of the credit crisis.
We take a look at eight steps you can take to help you get back on track.
Dreaming of a comfortable retirement without any money worries? You need start thinking about how much cash you are putting away now. Here’s our guide on how much you need to save and how to do it.
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