The impact of the Lifetime ISA on the UK savings market
In his 2016 budget, George Osborne announced an increase in the annual ISA limit, from £15,240 to £20,000, in addition to the introduction of a new flexible lifetime ISA. Both are designed to encourage the UK population to adopt a lifetime savings habit. However, with the UK savings market in the state that it’s in, Mapa wonders if these efforts to resurrect the concept of “life savings” are too little too late.
The Lifetime ISA
The new Lifetime ISA will launch in April 2017. It will allow savers to save up to £4,000 a year and receive a government bonus of 25% when they withdraw the money to buy their first home, or for retirement purposes after the age of 60.
Regenerating the lifetime savings habit
Globally, and in the UK especially, recovery from the 2007 economic crash has been built on credit. The government and the central banks worldwide wanted people to spend. The base rate was lowered to bring down interest rates, to make taking on debt less intimidating, and to lower the cost of everyday living so that money will appear to go further.
All of this happened without an increase in wages and when unemployment levels were still relatively high. In other words, people were incentivised to spend more than they had, without receiving any encouragement to balance this by saving any money that was not spent. As a result, the UK household savings ratio dropped to 4.4% in 2015, its lowest level on record. This has happened at a time when state support for retirement has been dramatically reduced. The potential impact of this has forced the government to recognise that there is a need to rekindle Britain’s love for conservatism and saving. In the 1980s, the household savings ratio was over 16%.
A series of interventions
In the 2015 budget, George Osborne announced the introduction of a personal savings allowance, due to come into effect on April 6. The allowance means that standard rate tax payers can earn up to £1000 in interest on their savings without it being taxed, even if the savings are not held within an ISA. Given that this means the vast majority of individuals will be able to save completely tax-free without needing to open an ISA, a product which many individuals find confusing, the new ISA could be seen as rather pointless.
The premise for its introduction seems to be the 38% increase in ISA savings value from 2013-14 to 2014-15 that resulted from the last uplift in the ISA limit. Yet the majority of the increase came from the minority of savings: people with large amounts of disposable income who make up a relatively small proportion of the overall population, reflected in the fact that the actual number of ISAs owned actually declined over the same period.
A fundamental misunderstanding of context
Most people see little reason to save on a day-to-day basis. Indeed, the motivation to save only really appears when a specific reason for having access to sizeable funds emerges. Once individuals have begun saving, the habit becomes self-reinforcing, as people realise that having that cushion makes them feel more secure. The government is hoping to expedite this process with the 25% incentive. However, there are two issues with this.
The first is that the main reason people want to save is to have a “rainy day fund”. The second is that additional goals tend to be short-term in nature. In both cases people want to have instant access to their savings. The Lifetime ISA doesn’t provide this. Unless the savings are taken out for a first-time home purchase, then savings that are withdrawn early (before the age of 60) lose the 25% bonus and are subject to a 5% tax.
Another major issue that seems to have been overlooked is the fact that it is common for people to underestimate their ability to save. Convincing people of the importance of saving is not the issue. Most adults recognise the fact that having savings is a good idea, but frequently claim that they cannot afford to do so. In this scenario, using constructs such as the new Lifetime ISA to encourage UK constituents to save is unlikely to work because it does not tackle this barrier. With the new ISA, the onus of responsibility still lies solely with the saver. No assistance is offered to help savers identify ways in which they could cut back spending in order to release capital for saving.
This lack of savings guidance is a potential issue when it comes to young savers, at whom the ISA is aimed. Millennials are often referred to as “the Peter Pan” generation because they have little financial independence. As such, they lack confidence in financial dealings and sticking to a regular savings plan that would allow them to capitalise on the opportunity presented by the new ISA is likely to be daunting.
However, there are multiple tools available on the market that are attempting to help. These include: PFM tools, such as Meet Cleo and Tellur; Squirrel, which automatically extracts savings for employees directly from their pay; and savings apps, such as Digit, that make it possible to tap and save. Yet, despite what the government is trying to achieve, the Chancellor has not made use of this technology.
A false achievement
These issues with the new ISA are unlikely to dampen its success on the surface.
Undoubtedly, all major retailers will duly launch a lifetime ISA; after all, having more capital to lend is attractive for banks, as is increased resilience to stress. Similarly, those with considerable savings will likely be keen to take advantage of the higher limit when it comes into effect in 2017. It is thus highly likely that by the time Osborne comes to make his Autumn statement speech, the government will be celebrating the boom in savings generated by its latest intervention in the savings market. However, this supposed win will most likely reflect the spending power of the 1% rather than the nationwide attitudinal and behavioural shift that the introduction was hoping to achieve.
Mapa produces regular reports and dashboards on the topic of digital banking, including savings and money management, to help financial services providers understand what their competitors are doing, and what consumers see on different devices. For more information, contact us today.