Auto-enrolment: Workplace pensions vs lifetime ISAs?
The pensions industry has been subject to unprecedented levels of change over the last five years. In fact, in the last few years alone there has arguably been more significant change than since the State Pension was first introduced in 1948! Auto-enrolment is one of the most significant changes in UK pension history, with the government focusing more than ever on encouraging individuals and their employers to take responsibility for their long-term financial well-being – and positioning less reliance on the state.
However, with all the change that has and continues to take place, it is also not surprising that many employers find themselves confused about pensions in general and the duties that apply to them. Unfortunately, it is likely that the introduction of the Lifetime ISA may add further to this confusion. So, let's address some of the questions that might exist.
Will the Lifetime ISA be an alternative to the Workplace Pension?
As the law currently stands, absolutely not!
Employers are required to enrol their workers specifically into a workplace pension for a number of good reasons. These are regulated pensions vehicles and must adhere to certain rules in order to protect the scheme members. As well as more general pension regulations (which have been developed through time and many as a response to industry scandals), the standard of the pension scheme itself must meet or exceed certain minimum requirements - including rules around member costs/charging structures and also minimum pension contribution levels.
Can individuals choose to opt out of workplace pensions in favour of the Lifetime ISA?
Yes, this will be possible. However, importantly, the process must be the individual making the decision to opt-out of the workplace pension (i.e. after having been first automatically enrolled) in order to then redirect their own contributions to the Lifetime ISA. Under auto-enrolment rules, all eligible jobholders (i.e. those between age 22 and State Pension Age and also earning over £10,000 pa) must be automatically enrolled into a workplace pension scheme and it will be their decision whether to opt-out. It is illegal for an employer to take any action that might sway this decision.
N.B. Lifetime ISAs will only attract the government bonus in certain circumstances and individuals must be under age 40 in order to start a Lifetime ISA.
Will employees be better off saving in Lifetime ISAs?
For the vast majority of employees this is unlikely to be the case. By directing their money towards a Lifetime ISA rather than towards their workplace pension they could be missing out on valuable financial benefits. For example, employer pension contributions - since minimum levels of employer pension contributions MUST be paid to workplace pensions.
The two products also attract different tax treatment, with each being more valuable depending on an individual's specific circumstances. However, it is possible to benefit from both running side by side, where this is affordable and where the person is eligible for the Lifetime ISA.
It is also important to remember that workplace pensions are essentially geared towards longer term saving. A lot of expertise will have gone into structuring the default investment strategy that sits behind a workplace pension – in order to aim to achieve real returns over the longer term (i.e. contributions retaining their value over time compared with price inflation as well as achieving more general investment returns). For the less financially astute individual, deciding on the right investment fund for their Lifetime ISA contributions can be more complex to manage.
Do employers have to offer both?
No. All UK employers will have a duty to comply with the auto-enrolment legislation and offer a workplace pension, but they do not have to offer access to a Lifetime ISA.
If your company hasn't yet reached its Staging Date (and for those who have but have not taken appropriate action!), it is vital to get to grips with your duties, the deadline dates that apply and the likely costs of compliance. The latter will take many forms since there will be a cost associated with implementing your auto-enrolment solution, a cost in relation to employer pension contributions and also penalties and fines that would apply for non-compliance (e.g. £400 Fixed Penalty Notice, £500 per day escalating penalty notice for employers with between five and 49 employees).
Auto-enrolment solution by Aon
About the author
Clare Abrahams is a qualified actuary and Head of Auto-enrolment for Aon Employee Benefits. As part of
her role, she has been involved in developing auto-enrolment solutions for both large and small clients,
including the creation of Littleblue2go, a solution for the SME market which incorporates a market
leading pension scheme with the support required in becoming auto-enrolment compliant.
About the company
ICAS have an agreement with Aon to provide their Littleblue2go streamlined auto-enrolment solution at a discounted rate. For details on the Littleblue solution - which Aon is offering to members at a discounted rate - go to icas.com and search tor “Littleblue2go”.
This blog is one of a series of articles from our commercial partners.
The views expressed are those of the author and not necessarily those of ICAS.