LISA for a Lifetime?

LISA (Lifetime Individual Savings Account) links saving for a first home with saving for retirement.  Will it really last a lifetime?

LISA is a new incentivised way to save for retirement if you’re a UK taxpayer. It has different tax rules than typical pensions and the facility to take out savings to put towards a first home.  In asking whether LISA is a complement or rival to existing pension products, the Pensions Policy Institute shows that it is another complex option in an already crowded savings landscape.

It’s hard to tell whether LISA will have a positive effect on saving or is clearly better than a pension for any individual. But it’s very likely that a key selling point of LISA – tax-advantaged saving for a first home – will be popular. Will it stop there, so LISA is just a way to save for a house? Or will LISA savers stay with it to save through to retirement and make the “Lifetime” brand meaningful?

LISA for first home buying

As in the UK, home ownership is culturally important in New Zealand, where KiwiSaver has been linking saving for a first home with retirement saving since 2007. There are concerns over the increasing unaffordability of house purchase and similar falls in the rates of home ownership in both countries.  Between 2001 and 2013, the proportion of New Zealanders aged 35 to 44 owning a home fell from 65 per cent to 54 percent.  In the UK the proportion dropped from 74 per cent to 64 per cent. Average house prices in both countries rose by around 20 per cent over the last ten quarters.  Given similar house buying characteristics, KiwiSaver could give a clue as to how popular LISA might be.

KiwiSaver itself has been extremely popular, and part of the attraction has been the potential for help to buy a first home. In 2010, when these features first started to be used, an Inland Revenue evaluation report found that 24 per cent of KiwiSavers joined partly because of the home buying features with 10 per cent saying they were the most important reason.  In March 2015, the Government made the KiwiSaver HomeStart features more attractive, in order to “open the door for 90,000 young New Zealanders over the next five years to own their own home”.

A couple on median earnings could reasonably aim to get close to 10 per cent of the median average house price from their KiwiSaver withdrawal with this grant if they both had made KiwiSaver contributions at the most common rate for five years. After 3 years in KiwiSaver, a member can withdraw all funds in the account to buy a first home, provided $1,000 is left in the account.  The Government adds a grant of $2,000 for each year of KiwiSaver membership up to $10,000 if the home is a new-build, or half that for an older property. But with Loan to Value restrictions and Auckland prices being much higher than the national average, other savings are likely to be needed to complete a deposit on a mortgage, especially for those with a less consistent KiwiSaver contributions history.

In the twelve months to March 2016, around 25,000 KiwiSaver withdrawals were made for first home purchase. This represents around 2.5 per cent of the average number of members aged 25-44 through the year. If this were a steady state, it would mean roughly half of that age group might eventually use their KiwiSaver funds towards a first home.

A couple putting in the maximum LISA contribution could have over £50,000 after five years including the Government bonus. They could withdraw all of that for first home purchase, which could reach nearly 20 per cent of the average UK house price. The statistics for average vs. median national price for different types of dwellings are too complicated to be provide an exact cross-country comparison, but LISA does look as though it has the potential to provide a greater share of a first home deposit than KiwiSaver does currently.

Will LISA be popular for home buying? The comparison with KiwiSaver evidence suggests yes.

LISA as a lifetime account to retirement

Will LISA be any more than a way to buy a home? Here, the comparison with KiwiSaver jars. KiwiSaver is a lifetime savings account by default; LISA only is if the saver so chooses. KiwiSaver is an account which stays with you from the age at which you are enrolled as a child or in your first job. KiwiSaver can be closed before age 65 only through permanent migration or serious illness. If a KiwiSaver stops making regular contributions, the default is to start again on changing jobs. Someone can only open a LISA from age 18 to 39, and there is no auto-enrolment to start replenishing it once it has been emptied for home purchase.

To make the “Lifetime” brand of LISA more meaningful, there would have to be a way of making it attractive to stay saving in the account for retirement after home purchase. LISA evolved as a compromise to the proposal that UK pensions should be reformed to the ISA-type taxation system. If people start young with LISA, and stay in it as an alternative to pensions, then the pensions system faces a slow death.

But as the PPI analysis shows, once the first home benefits of LISA have been obtained, people would mostly be better off saving instead in the pensions into which they are auto-enrolled, because of the compulsory employer contribution. Many people could not afford to save both in LISA and pensions to get the most of LISA’s incentives as well as the benefits of pension saving, but LISA might prove a better choice than pensions for additional saving which did not attract an employer contribution. Navigating these choices demands a higher degree of engagement with investment decisions than many people would want to take on.

If there is a desire that policy should encourage a true Lifetime account, then sooner or later the idea of “pot follows member” will have to be tackled.  In KiwiSaver this happens automatically by the Inland Revenue directing auto-enrolled and additional contributions into an individual’s single KiwiSaver, no matter whether or where he or she works.  In the UK, any individual can have a pension savings pot from each employer they have had, and a pot(s) from periods of self-employment; and now a LISA as well.  If LISA proves popular, and a government prefers the ISA style of taxation, the demise of pensions could be hastened by allowing people to transfer their pension pots into their LISA account.

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