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Under 40? Got some spare cash? Should you open a Lifetime Isa?
Launched this week, the new savings product for the millennial generation has some tempting incentives.
First, it offers a 25 per cent government bonus (worth up to £1,000 per year if you make the maximum contribution of £4,000). Second, it’s flexible. You can use the money saved towards buying your first property — or as a retirement fund, which you can access tax-free after you turn 60.
There are some downsides. You can’t take money out of the account for any other reason — and if you do, you will have to pay a penalty of 25 per cent on withdrawals.
If you use the Lifetime Isa to buy a property, it must cost less than £450,000 (though according to Nationwide, the average house price in London has already surpassed £473,000).
Although it has been touted as a pensions alternative, the bonus is unlikely to beat the combination of employer contributions and tax relief on pensions savings.
And if you want to invest your savings in the stock market, then you are entirely responsible for researching and making these decisions.
The Lifetime Isa has a number of critics, including former pensions minister Baroness Ros Altmann, who thinks it has the potential to be a “future mis-selling scandal”. But what do the millennial generation think? Is this a savings product they can see themselves using to buy a property, or start a pension — and do they really understand how it works?
FT Money teamed up with BritainThinks, a research and strategy group, to road test the Lifetime Isa with a group of 12 young people aged between 18 and 39. We then conducted a poll of 1,000 more — and the results make challenging reading for policymakers, young people and their parents.
Here are the key highlights from our research — and, in a companion article, the Treasury answers some tough questions that our panel and FT Money readers put to us about how to use the Lifetime Isa.
Property is their priority
Four in ten say they will use the Lifetime Isa to save towards their first property — though some fear they will never save enough, and Londoners worry the £450,000 limit is already too low.
More than four in 10 of the 18-39-year-olds we polled said they thought they would use the Lifetime Isa to save towards a property. However, over half of those currently renting feared they would never be able to afford to buy a home.
There was a similar sense of fatalism among the younger members of our workshop. “Buying a house feels so unfeasible, you might as well go to the pub,” said one.
For those with a bit more cash to save, there were different concerns.
The length of time needed to amass a decent housing deposit was one. What would happen, one asked, if he saved into a Lifetime Isa for 10 years only to see house prices skyrocket?
Londoners feared that limiting the maximum property value to £450,000 would not be high enough — particularly if they were teaming up with friends or family members.
“It does seem ridiculous that you could be in a financial position to buy your dream home, but the price goes up to £451,000 — and the dream is gone,” said 30-year-old Michael.
Nevertheless, owning a property was unanimously seen as more important than starting a pension.
“We all feel the pension thing is just so far off, we’ll think about that once we’ve got the house,” said one. “But it increasingly feels like it’s either/or.”
They don’t understand pensions
Over a third of 18-39-year-olds polled agreed they would prefer to pay into a Lifetime Isa instead of a pension — even though this could mean losing valuable employer contributions and tax relief. Young people were unable to judge whether a Lisa was a better prospect than a pension.
We asked our 12 workshop participants if they had a workplace pension — but three of them were unsure (and one was a teacher). When you’re worrying about how to pay the rent, worrying about retirement seems like a luxury, they suggested. “None of my friends ever talk about pensions,” said 36-year-old James. Few knew what percentage of their salary they were paying in, or if their employer was matching contributions — or what funds their pension was invested in.
“I don’t have any idea where the money goes. I don’t even know who my pension is with,” was a typical response.
The FT/BritainThinks poll also suggested a widespread lack of pensions know-how, even though one-third of those polled said they had a pension through their employer.
The million dollar question is whether they would give up pensions savings (and risk losing both employer contributions, and tax relief) in order to fund a Lifetime Isa.
In our poll, 38 per cent agreed they would prefer to pay into a Lifetime Isa instead of a pension. Furthermore, over half (59 per cent) agreed that young people were less likely to pay into a pension if they were paying into a Lifetime Isa.
“The pecking order of priorities for millennial savings was clear — lifestyle experiences such as holidays and festivals come first, property comes second and pensions are a rather distant third,” said Deborah Mattinson, founding partner of BritainThinks.
When it came to our workshop participants, only one felt he would actively “opt out” of pension saving in order to fund the Lifetime Isa and save up for a property deposit. Most regarded the Lisa as an “as well as” product that they would hold alongside a pension.
However, there was much confusion over whether saving into a pension was better or worse than saving into a Lifetime Isa. The young property owners in our workshop (who could not therefore use the Lisa to buy a home) were flummoxed about how to find out the answer.
“I want to know how this compares to a pension — because basically that’s what it is,” said Laura, 38. “At first glance, it looks quite generous, but I’m not so sure.”
Nearly half of those polled (47 per cent) disagreed with the statement “I know what tax relief I get on my pension”, a key metric for determining the Lisa’s suitability as a pension.
Although two-thirds of 18-39-year-olds were confident that they knew their income tax bracket, 17 per cent disagreed.
More worryingly, nearly half of those polled (47 per cent) agreed that higher rate taxpayers would be better off saving into a Lifetime Isa than a pension suggesting widespread misunderstanding of how the benefits compare.
But the young people in our workshop also said they felt more confident about Isas as an savings vehicle than pensions. “There have been so many pensions scandals,” said 38-year-old Laura. “Is it really the most appropriate investment for old age? Wouldn’t buying a property be better?”
Cash is king
More than half of the 18-39-year-olds polled said it would be better to use the accounts like a Cash Isa, rather than invest in the stock market, which may not be suited to long-term savings. The first place they would go for advice on the Lifetime Isa was their bank — however, no banks are ready to launch a product yet.
When we asked our workshop participants if they would open a Lifetime Isa, a third said yes — and all would use it like a cash Isa. This view was shared by 54 per cent of those polled.
“I wouldn’t take a chance [on putting stocks and shares into the Lisa] because I’m not inclined to do the research,” said one.
We then revealed that the only providers who would be ready to launch a Lifetime Isa product from April 6 were all investment platforms — Hargreaves Lansdown, Nutmeg and The Share Centre.
This caused uproar. “People our age wouldn’t know where to go to invest in stocks and shares, so this sounds like a massive fail,” said Tamsin, 26. “If I struggle to understand something, I mistrust it.”
Although most of our panel had heard of these brands, they were not as familiar as their own banks (which they had expected to offer a cash version of the Lisa).
“If this is a government savings product, why isn’t it being offered by NS&I?” asked Peter, 25.
Similarly, in our poll, nearly 40 per cent of 18-39-year-olds said they would turn to their bank for advice on the Lifetime Isa (the top answer, followed by online forums at 39 per cent, and parents and the government tying for third place at 30 per cent).
The Lisa bonus appears to be very attractive because cash savings are attracting a tiny fraction of that amount.
In our poll, 68 per cent agreed that they knew what level of interest they were receiving on their cash Isas. Our panel were similarly confident, even though they lacked details — “I couldn’t tell you the precise amount, but it’s rubbish,” said one.
Which begs the question — why are they not more interested in investment?
They have little knowledge about investing
The under-40s have a worrying lack of knowledge about their finances — particularly when it comes to investment and pension savings.
Investing was seen as something that people with lots of money do by our panel, who described it as complicated, difficult and risky. Even those who held pensions regarded these as savings products, rather than investments.
We asked if they would consider using the Lifetime Isa as a stocks and shares Isa if the money was going to be tied up for ten years or more.
“I didn’t even consider the stocks and shares option,” said one participant. “I wouldn’t know where to go to do that.”
“It sounds a lot like gambling,” said another.
“People our age don’t have a great deal of money, so I don’t think they would want to take any risks,” said 24-year-old Anna.
In our poll, just 9 per cent of 18-39-year-olds said they had a stocks and shares Isa, compared to 38 per cent who said they had a cash Isa.
So if they were to use the Lisa for investing, who would they ask for advice? In our poll, 30 per cent selected their parents as one of their top three sources of financial advice. But “financially sorted friends” (as one participant put it) also play a key role.
“In the current climate, my friends know more than say, my mum, about things like getting a mortgage,” said James, 36.
“I got a private pension because my friend told me he had a talk about it at work, and they said you absolutely had to get one before 30,” said another.
The most financially knowledgeable member of the group (who had a private pension and a stocks and shares Isa) freely admitted he had received a lot of help and advice from his parents. But he was also very interested in money and investing, and was the only one of the 12 who confessed to reading the Money section in a national newspaper. This was not what the other members of the group wanted to hear — many expressed a desire for somebody to “do all of this stuff for me” and were reluctant to invest too much of their own time.
“These Hargreaves Lansdown people — they will tell you what to invest in, won’t they?” one participant asked. When it was explained that she’d have to do the research herself, or pay a financial adviser, she was indignant.
“It’s an irresponsibility, then. I would not feel comfortable doing all of this behind a computer screen.”
The appeal of the ‘lock up’
A surprisingly high number of young people were positive about locking up their savings in a Lifetime Isa — even though they would risk a penalty if they needed to access the cash early — as they thought it would incentivise them to save.
Our panel had some inventive strategies when it came to saving their cash (many of these involved a parent acting as a gatekeeper).
One of the youngest participants said she was saving for a holiday, and transferred a set amount of cash to her mother’s bank account each month where she couldn’t get at it. Another had his salary paid into a bank account with no cash card or Pin number. Instead, a monthly direct debit paid enough money to get by into a separate account. One participant took the lock-up more literally, confessing to owning a safe.
Given the 25 per cent bonus, the thought of locking up their money either to buy a property or save for a pension was one the group liked more than disliked. However, others said the risk of losing money if they triggered an early-withdrawal penalty would discourage them from opening an account.
Our poll showed that 32 per cent of 18-39-year-olds were positive about the lock-up, and a further 29 per cent were neutral about it.
Noting her propensity to “dip in” to her savings to fund weekends away, 30-year-old Georgia said: “Maybe that’s what this generation needs — a good kick up the bum in terms of being cavalier with savings.”
Some felt the Lifetime Isa was potentially more flexible than a pension: “At least you can get the money out, even though there is a penalty”.
Others suggested they would take on second “top-up” jobs if they ran out of money, rather than plunder their savings. Laura, who had already bought a flat, said she rented it out through Airbnb to make extra cash (which prompted envious glances from the other 11 participants).
They find money ‘boring’ and ‘depressing’
Many feel that their savings goals are so unachievable, there is no point in spending time learning how to manage their money.
Anxious, fearful, bored and depressed. These were the words our workshop used to sum up how they felt about their finances.
The thought of saving £400 a year — let alone £4,000 — was a struggle for many. “If I’m not going to save the whole amount, is the Lifetime Isa even worth it?” one asked.
“It’s great that the Lifetime Isa exists, but I’m not ready to use it yet,” said another.
Financial goals typical to this group (including those who owned a property) were to clear credit card debt, and “stop living in my overdraft” as one participant put it.
Similarly, 74 per cent of the 18-39-year-olds we polled agreed that the financial outlook for their generation was significantly worse than for previous generations.
“I’ve stopped reading economic news as the message is so negative,” said John, 24. “We are constantly being told we’re going to be worse off than our parents. So I avoid it.”
“Millennials want to buy a house, but fear this may be unachievable, and saving for retirement simply isn’t on their radar screen yet,” said Ms Mattinson. “They feel that learning how to make their money work for them would be too much effort for too little gain — a further barrier to a realistic approach to long-term financial planning.”
In the words of one participant, many millennials simply feel they “cannot afford to save”. Several said they were waiting for a pay rise or promotion, at which point they would start to get “serious” about saving for the future.
However, they perked up about pensions saving once we demonstrated the effects that compound interest could have.
Albert Einstein may or may not have described compounding as the eighth wonder of the world. To our poll group, the issue was academic. Staggeringly, 56 per cent did not know what it was.
When we showed our workshop group how small, regular payments into a pension from a young age can snowball over time into something much bigger, they were shocked.
“I’m sure nobody in their early 20s starts a pension,” said one. “If only we had known!”
Methodology: BritainThinks conducted a workshop with 12 people aged 18-39 on March 14 and interviewed 1,008 people in the same age group online between March 17-19. Data were weighted to be representative of all 18-39-year-olds.