A Lisa is a Lifetime individual savings account (Isa) and it is a new way to save from post-tax income, coming in April 2017. It is aimed at those targeting their first home purchase. It comes with an incentive, similar to a pension, where the government will give a top up of 25% of the investment. This is, incidentally, the same top-up rate as a basic-rate taxpayer receives on their pension. Withdrawals from a Lisa are tax free. It is almost like a hybrid of Isa and pension.
What are the details?
Like a pension, but unlike an Isa, there are restrictions on how and when an individual can take their money from a Lisa. It is only available to those aged under 40. The only withdrawal that can be made (without penalty) is for funds to purchase a first house with. Otherwise, savers probably need to wait until they are aged 60. There may be other life events that allow money to be accessed without penalty, but no details have yet been announced. And the maximum saving into a Lisa is £4,000 a year, subject to overall Isa limits not being exceeded.
Where salary sacrifice is used there will be an advantage in using a pension, where the employee and the employer save on national insurance contributions. This is not the case with a Lisa.
What is the penalty if money is taken for other reasons?
If money is taken before age 60, not to buy a first home (or perhaps some other specific reasons to be defined) then a penalty will apply. This will be to lose the government top up, any growth on that top up, plus a 5% charge across the value withdrawn.
How does it work with auto-enrolment?
For most people who are eligible for a Lisa, staying in the pension and benefiting from employer contributions and tax relief will still be the best form of long-term saving. A Lisa may be a useful addition to this for some, especially those planning to purchase their first home soon.
What type of employers will be interested in a Lisa?
Some employers may like the new concept more than others. For example, those recruiting lots of young graduates each year versus those with a more mature workforce. Employers will need to consider several key questions. Firstly, what role, if any, do employers see for the new Lisa for their workforce? Do employers see it as their role to help save for a mortgage? Would the Lisa appeal to parents wanting to support their children in saving for their first home? And do employers wish to give younger employees a direct choice around where some of their pay is saved (retaining at least a minimum level of pension savings)?
What sort of challenges will employers face with the Lisa?
As more becomes known about Lisas, we will be able to assess the challenges and opportunities in detail. In the meantime, employers will need to be aware of: ensuring members really understand their choices, be it pension, Isa or Lisa; and being alive to the risk that an individual may breach their Isa limit if they also have an Isa or Lisa elsewhere.
What do charges look like on the Lisa?
The Lisa is for relatively small investments, apparently complex to administer, and if intended for house purchase, may be withdrawn quickly. This means the charges may seem high to members when compared to other options.
What’s the optimal investment strategy for a Lisa?
This needs to be managed carefully to ensure people are investing in a way that is appropriate for their plans. For example: Are they investing for a house purchase in the next five years? Will they be doing it in the next five to fifteen years? Will they be investing to age 60?
The optimal investment solution will differ depending on an individual’s plans, so helping them choose the right option for them will be important.
In summary, Lisas are seen as a useful addition to the options available for employers to offer to employees. There will be certain groups of employees who will see it as attractive, primarily younger staff who have house buying as a priority. If employers are to offer Lisa savings successfully then getting the communication right is going to be key.
Alan Ritchie is head of employer and trustee proposition at Standard Life