Is the Lisa a stalking horse for pension reforms?

The pension has long been the go-to product for generations of savers looking to build a nest-egg for retirement.

Tens of millions of us have one; either a personal pension which we set up ourselves; a state pension which we fund through national insurance contributions; or a workplace plan typically arranged on our behalf by an employer.

Pensions are so deeply ingrained into our national savings psyche that most of us will have several policies, perhaps more, and may have even lost track of a few over the course of our working lives.

But from next month a new kid will arrive on the savings block competing for our pensions pound and she — yes, she — threatens to cause quite a stir among the most loyal defenders of pensions.

The Lifetime Isa, or Lisa, as “she” is also referred to, is no ordinary Isa but a dual-purpose savings account hitting the market at a time when the future of pensions has been in doubt.

The Lisa offers attractive cash bonuses to under-40s to help them save for either their first home, or to take tax free from the age of 60.

Seductive. But Lisa has a sting in her tail. Dipping into the accounts for any other reason than the purposes above (aside from the saver having a terminal illness) will trigger a 25 per cent penalty on the fund after the first year.

On the surface, the Lisa could be just the tonic needed to encourage millennials — who aren’t generally turned on by retirement saving — to put away a decent amount for later life.

A government intent on pursuing reform stealthily could continue to roll out the Lisa by increasing the upper age eligibility threshold to open an account from 40 to 50, for example

In recent years, hundreds of thousands of young people have been automatically enrolled into workplace pensions but are mostly saving the bare minimum.

The Lisa is also an easier product to understand than pensions, which are notorious for their impenetrable jargon and complex and complicated tax rules.

In contrast, the Lisa’s message is simple: pay in four pounds and get one pound free. This is far easier to grasp than pensions tax relief which is poorly understood and in need of reform.

While few would begrudge the extra help the Lisa will offer cash-strapped and indebted under-40s, there have been many voices raising concerns about the damage Lisa could inflict on the nation’s retirement saving levels — which are just starting to recover through the automatic enrolment policy push.

Chief among the concerns is that young savers — desperate to build a first home deposit — will divert cash destined for a workplace pension to the Lisa and, in the process, lose a valuable employer pension contribution.

While this may seem obviously unwise, the FCA was so concerned about workers being tempted by the Lisa, it has proposed measures to warn savers about the risks of giving up an occupational pension when Lifetime Isas are sold.

A second issue surrounds the use of the Lisa for a retirement fund. Unlike a workplace pension, which has a 0.75 per cent charge cap on the funds used by most savers, the Lisa is not subject to price controls to ensure your hard-earned savings aren’t gobbled up by excessive charges.

There is also a layer of governance over workplace pension accounts — not present in the Lisa — which creates a more protected environment for savings to grow for the long term.

The Lifetime Isa will also do little to boost formal retirement saving levels among the self-employed, widely recognised as “under-pensioned”, as they are mostly aged over 40 and too old to open an account.

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These drawbacks have been highlighted by those who argue the real purpose of the Lisa was a stepping stone to much wider, and controversial, reform of the pensions tax relief system — considered the unfinished business of the previous coalition government.

The Lifetime Isa emerged after a sweeping review of the pensions tax system in 2015, which had floated radical plans for pensions to be turned into Isas — where contributions are made from taxed income, but taken tax free when funds are drawn in later life.

This radical flipping of the tax system did not gain the political traction needed for full-blown reform, largely due to a backlash from Tory MPs worried about the electoral impact of scrapping higher rate pensions tax relief.

But radical reform of this sort remains a key prize for any government looking to trim the soaring costs of pensions tax relief, as an Isa tax framework brings forward big tax revenues.

A government intent on pursuing reform stealthily could continue to roll out the Lisa by increasing the upper age eligibility threshold to open an account from 40 to 50, for example. It could also extend the period for which payments can be made into the Lisa, and bonuses paid, beyond 50.

This would embed the Lisa more deeply into the savings neighbourhood.

While it is unlikely that we will see any major pension reforms in this month’s Budget, it is possible the government will continue to chip away at the lifetime and annual savings allowances and in doing so will push even more higher earners out of pension saving and into the arms of alternatives, such as Isas.

With so many forces moving against pensions, the industry will be keeping a close eye on the new kid on the savings block and the impact she will have on one of its oldest residents.

Josephine Cumbo is the FT’s pensions correspondent; email: josephine.cumbo@ft.com Twitter: @JosephineCumbo