Government: LISA will have 'negligible impact' on pensions

The government says its figures do not assume that any individuals opt out of workplace pension schemes to save into a Lifetime ISA.

The assessment added: "They assume that some individuals choose not to save into personal pensions and save into a Lifetime ISA instead, where this could be in their interest to do to (e.g. self-employed basic rate taxpayers)".

However industry research found that more than a third of younger employees would prefer to save into a Lifetime ISA than a pension, even if it means they would be giving up a potentially valuable contribution from their employer.

Capita recently revealed that 34% of employees aged between 16 and 34 said they would rather use an ISA to save for retirement than a pension, with just 15% of young people disagreeing.

The government predicts a cost to the Exchequer by 2021/22 of £850 million as a result of the LISA top up being paid.

The impact assessment also shows the government expects 200,000 people to save in a Lifetime ISA in 2017/18 and over 800,000 to be saving by 2020/21.

The average contribution in 2017/18 is expected to be £3,500, meaning the LISA market would be worth £700m in 2017/18.

Tom McPhail, Head of retirement policy at Hargreaves Lansdown, commented: “The LISA will undoubtedly prove popular with those savers who want the flexibility to save for the long term, benefit from the government top up but who also want to retain access to their savings. In the short-term, having announced the idea it makes sense for the government to press ahead with the launch of the Lifetime ISA, especially as we know ISA providers will be ready to meet investor demand in 2017.

"However in the longer term, there is clearly more work to do to tidy up the increasingly messy savings landscape for investors. We’d like to see all the different ISAs brought together in one simple ‘super ISA’ and for pension tax relief to be radically reformed for a simpler, fairer and more cost-effective system.”

Richard Parkin, Head of Pensions Policy at Fidelity International, added: "These seem like big numbers but are actually relatively small when compared to the current ISA market.

“In particular, looking at ISA statistics for the tax year 2013/14 issued in August 2016, there were approximately 3.2 million subscriptions to Cash ISAs by those under age 40 with a further 450,000 into other types of ISA. Assuming only 20% of these people are saving for a deposit on a house then this would suggest over 700,000 might be attracted to the Lifetime ISA even before we consider the additional take-up that will be driven by the attraction of the 25% bonus.

“The opportunity to get a 25% bonus when saving for a house will no doubt appeal to many young people struggling to scrape together a deposit. It seems likely then that many of today’s existing savers will quickly switch to this new product. As these numbers show, just looking at what’s already in Cash ISAs would suggest that the government estimates of take up are on the low side, perhaps significantly so. This isn’t allowing for switches from other savings’ products or the incentive for the bank of mum and dad to stump up extra cash to take advantage of the top-up.

“The government recognises that their estimates are highly uncertain but it’s clear that this could be a very costly policy. Given the chancellor’s original aim was to limit the cost of tax-relief on pensions it was somewhat surprising to see this new incentive being announced in the last budget. We have to make sure that any overrun of cost on the Lifetime ISA isn’t used as a reason to take aim at incentives to save for retirement.”