Once in a Lifetime
This article was originally commissioned and published in the April 2017 edition of the Investment Life & Pensions Moneyfacts publication.
If one listed them, the majority of people need to cover the same major events during their lifetime: college education, house purchase, children’s education, pensions and long-term care. If the government wanted to, they could have a ready-made approach to encourage people to save for all these events. By linking their government support to these events, it would encourage constant saving as well as helping people to realise the trade-off that was happening each time they dipped into their funds.
Similarly, deciding upon how much to draw down, as a pension should be a decision that clearly informs how much would be left for the provision of long-term care. If a government supported account-incorporated support for long-term care savings it would be obvious what the choices were when people were making them. Without this information, people are making key decisions without realising the full impact of them. What is needed are products that automatically link key goals and keep people aware of them so that trade offs are obvious when they happen.
A start to the solution
The Lifetime ISA has arrived. This new arrival on the investment shelf has some positives and undoubtedly it will help increase the amount of people even thinking about long term saving. The generous top-ups of 25% per annum on up to £4,000 invested are easy to understand and could add up to £32,000 over the maximum number of years that the product qualifies for government top-up.
Another big plus for the product is that the Lifetime ISA can be used to purchase a house and/or a pension. This links the two ideas in the heads of those younger savers at whom the product is aimed. Far too often, the desire to own their own home eclipses all other savings goals in the minds of the younger generation, with the result that when they finally get around to thinking about their retirement, it is later in life and their savings will be far less effective.
Given the usefulness of the Lifetime ISA both in encouraging saving and making people consider their own long-term needs, the question must be why we aren’t seeing far more publicity extolling their virtues. The Government and the industry do not appear to be getting behind the Lifetime ISA with much vigour. Recent research showed that two thirds of adults in the UK had never heard of it.
The lack of marketing from the industry is because the number of providers offering the product is currently quite small and doesn’t seem likely to grow very fast in the near future. This lack of push behind the Lifetime ISA is a bit of a vicious circle. Lack of publicity means that the demand level for it from the public is not enticing many providers into the ring. And when there are insufficient providers of a product, the lack of competition results in the product getting little notice and languishing on the shelf whilst other more competitive products hog the limelight, thereby decreasing demand.
Change of government
On the government’s side, the reason for the lack of impetus behind the promotion of the Lifetime ISA is the change of government that took place after the Brexit vote. I refer to it as a change of government because, although the country still has a Conservative government, it is radically different from the one that was elected just fourteen months earlier. An almost complete turnover of personnel has led to confusion in policy direction, especially as the complex issue of exiting the European Union is soaking up most of the government’s time and effort. As a result, policies in other areas such as investment and savings are drifting.
Many policies pursued by the previous Coalition and Cameron Conservative Governments haven’t been followed with the same urgency by the May Conservative Government. Nor have they been officially altered. Because of this stasis, George Osborne’s policies in the personal finance area are now floating adrift, neither pursued nor abandoned.
In particular, the often forecast move away from the current favouring of the pensions tax relief toward the style of tax relief given to ISAs has never quite materialised. Although this was never officially announced, all indications from the Treasury were that the idea was looked upon kindly. Currently pensions are exempt from taxation at contribution and their growth is also exempt from taxation. Only the resultant income is subject to tax, hence the definition of the policy as exempt, exempt, taxed or EET. In contrast, ISAs contributions are from after-tax income but the growth is tax-free as is the money at the point of withdrawal, hence the approach is referred to as taxed, exempt, exempt or TEE. The arrival of the Lifetime ISA was seen as a precursor to a wholesale move in the TEE direction, which much of the industry supports as it is seen as a fairer and more easily understood support for investment.
However, changing the taxation incentives around pensions would be a revolutionary move and would require a huge commitment from the government to drive it through parliament. The government had appeared to be edging in this direction, possibly allowing ISAs to be part of the auto-enrolment offering and allowing employers to make their contributions there but, post Brexit, the momentum behind this strategy appears to have dissipated. With no new overarching strategy in terms of encouraging personal investing being enunciated by the current Chancellor, Philip Hammond in this year’s Spring budget, it appears that ex-Chancellor Osborne’s strategy is marooned and Lifetime ISAs are marooned along with it.
Of course, the Chancellor is planning a September budget and maybe, at that stage, we will either get a new strategy or the old one will be re-energised and the government will put their weight behind it. But the signs aren’t good; by then the Brexit negotiations will be in full swing and the resulting pressure on the Treasury might be far too great to allow for long-term planning in other areas.
This leaves us in a situation where those who are conscientiously trying to invest for their future have no clear guidance as to which approach they should lean towards. The previous government have built half a bridge and there is no certainty that this government will complete it or whether they will pull it down and start again.
In the meantime, we have a number of policies that are conflicting in their aim and haven’t been pulled together in an overall strategy.
For instance, auto-enrolment is encouraging far greater numbers to save in order to provide for themselves in later life but the pension freedoms are making it seem as if the money accumulated is to be spent in the early years of retirement. The lack of encouragement for people to consider the lifetime income they require, or indeed to prepare them for the likely costs of long-term care that will almost certainly be needed if they live long enough, is storing up problems for the future. The rising dependency ratio will make this extremely difficult to deal with and indeed was the key issue behind the government’s goal of increasing the self-sufficiency of the population in retirement.
Lifetime ISAs – a more rounded view
People need to understand that they have multiple savings goals and to be aware of the need to balance these goals against each other.
This is where the lifetime ISA breaks the mould. Marketing campaigns for pension saving tend to focus firmly on the need for income in old age while ISA advertising is generally about making the most of shorter-term savings. Even the more specialised type of ISA, like the Help-to-Buy ISA, is focused on the specific goal of getting onto the property ladder.
The Lifetime ISAs is different. It links firmly in people’s minds two of the goals of long term saving, getting on the property ladder and retirement. At the moment, far too many people leave it very late to consider saving for their retirement because they are too busy focusing on the next major life-event. Thus, the trade-off is never seen until it is too late. When pension saving is delayed, the key benefit of compound interest doesn’t have much impact across the shorter time-frame and so it is far more difficult to amass enough money to live on in retirement.
With the Lifetime ISA, if you are looking to access money to buy a house, you automatically see the effect on your retirement savings, i.e. what’s left after you withdraw the deposit, and are at least aware of the effect on how much you can now expect to have to live on in retirement. How many people would have decided upon a more modest house if they had more clearly realised that by taking more out of their savings now to buy their house, they would have less to live off once they’d stopped earning?
Well begun is half done
The Lifetime ISA is a good start in that it helps those in more modest income brackets think about their own needs in later life and at least understand one of the trade-offs they are making before they actually decide to draw on those savings. Of course you can’t force people to make the right decisions, but at least a strategy designed to make all parts of the savings and investment strategy work together would be a start. The Lifetime ISA is an investment product aimed at savers and is therefore a far more comfortable product for people to become engaged with than the standard pension.
Lifetime ISAs are a very solid idea for those whose income levels mean that they have to make major choices about their savings, but the product only focuses on two events. In the future, they could morph and become a true lifetime savings account, through which Government could allow earners to be consistently saving for the major events that happen during one’s lifetime and providing encouragement via taxpayer support for that saving.
The Government and industry need to get behind the Lifetime ISA and encourage people to see the benefits. If Philip Hammond wishes to get the Government’s strategy of encouraging more people to invest for their own future back on track, he needs to start pushing the Lifetime ISA while seeking to expand on its ideas to allow the emergence of comprehensive Investment products tailored to suit the lifetime needs of the average individual.
Whilst the rest of their strategy is in the air due to the enormous political decisions that need to be made as the UK exits the European Union, at least a solid policy of encouraging people to invest efficiently and to use those resulting pots wisely would help to avoid the next two years being completely lost and would have made some progress in meeting their overall goal - trying to make people less dependent upon a state which is struggling to meet their needs and will struggle even more in the future.