Summer is usually called “silly season” in journalism. But it looks as if the same phenomenon might be affecting the Treasury Select Committee as well.
Its latest report, Household Finances: Income, Saving & Debt has a vast remit, but it’s actually only 61 pages.
If that strikes you as a rather tight length for a report dedicated to the *whole landscape of household finances in the UK*, you’d be right.
It’s too much for me to cover in one blog, but if I may take an issue close to my heart – the Lifetime Isa – I want to illustrate what happens when MPs believe they have the unrivalled ability to make sweeping judgements about our financial lives, having examined the issue for all of a few months and heard from a depressingly narrow band of industry and political insiders.
The TSC wants to scrap the LISA on the basis that it’s too complex, unpopular with the financial industry and could undermine saving into pensions. I don’t know where to begin. But hey, I’ll give it a shot.
At its heart, the report’s suppositions around lifetime savings are driven by a politically and economically fashionable shibboleth.
It goes like this. Consumers (particularly young ones) are a bit stupid. We can’t, and don’t, make sound decisions that are in our long-term interests.
Moreover, we can never be helped to make better decisions for ourselves – only nudged, pushed, led, shoved, even coerced into doing things that the Big Boys deem “good” for us.
Never thee mind that trust in the Big Boys was rather decimated after they crashed the world economy in 2008. Policymakers, economists and many sections of the media are in fierce denial that the public no longer accepts their authority.
So the myth of deference still persists, despite everything in our environment screaming out against it. More people going self-employed. More people living alone. More people going out into the vast online world, on their own, to shop, to research, to date, to earn, to question, to live…and yes, to manage their finances. This scares the living daylights out of the settled political order but it’s happening. Brexit is surely teaching us that out there, somehow, there is an inexorable pull towards individualism, independence and autonomy, however misguided it may seem to some.
And what’s driving this? The essence of what makes us human. We thrive when given choices, opportunities and resources. We innovate, we create, we explicate…it’s who we are.
But we need information – and yes, education. It needs to be balanced, fair, rigorous, not too complicated. When given this information, we’ll take it and we’ll run with it.
Sadly, it seems the powers-that-be don’t have such faith in humanity. The economist Richard Thaler doesn’t believe in financial education. And that’s why he came up with “nudge theory”. And it’s now become doctrine in certain parts of Whitehall.
It led to the creation of auto-enrolment, which tilts employees into workplace pensions that they know very little about. Ushered in by then-pensions minister Steve Webb, auto-enrolment ensures a pretty steady flow of captive business into pension funds until…well, the end of time, potentially.
And maintaining this steady flow of captive business obviously suits the old pensions guard. Giving consumers information about those pension funds? Not so much. This might invite too many questions about what people are investing in, and what happens when people move jobs and leave pension pots behind.
Allowing people actual choice about what to do with their money? My god!
This is where the Lifetime Isa represents a threat.
The LISA allows you to save for a home or retirement if you’re under 40. You put it in cash to save for the home deposit and shares when saving for retirement. The government gives you 25% each year up to £4000 (the maximum allowed) until you’re 50. You can then take the money out penalty-free, either when you’re ready to buy a house or at 60 years old. If you want to take the money out sooner, you’ll pay a penalty of 25% on the amount withdrawn.
That’s it. A product that is now deemed by the TSC far too complicated for our little millennial brains to handle has just been summed up in five sentences. Sure, more could be said about it…and for those who want a LISA, the info is out there.
Of course, the penalty is onerous. We’re talking about taxpayers’ money here and people’s long-term goals. LISAs are not trying to encourage people to access their money early, and seemingly the TSC has little faith in the financial sector to make this fact clear – and more worryingly, little resolve to make this happen.
You don’t have to buy a LISA. But some people really want it. Like me. I’m not a full-time employee, and a lifetime Isa offers me more flexibility than private pensions. It seems I’m not the only one – 170,000 people have taken out a LISA, despite near-zero marketing, only a handful of platforms being prepared to offer one and a pathetic choice of just one cash LISA (from Skipton).
The industry doesn’t like the LISA, as the TSC acknowledges, because it would have to pull its finger out, get to grips with the tax issues and figure out how to make itself foolproof against claims vultures in the future.
The industry also doesn’t like the LISA because it opens the can of worms that I spilled out above.
It doesn’t have to be either/or. The LISA can and should complement the workplace pension, particularly since (in case you weren’t aware, because the industry does a crap job of telling you) that current levels of contributions into workplace pensions won’t be enough to pay for a nice retirement.
The LISA is a valuable top-up option. Once removed, can you rely on pension schemes to buck up their ideas and provide you with more information, flexibility and choice to compensate? Hmm.
Even if people DID decide to have a Lifetime Isa instead of a workplace pension…where’s the balanced debate about the merits of that approach? Employer contribution rates are trumpeted as a benefit of workplace pensions. But in reality, the default rates are poor. If someone is getting contribution rates from their family (as many do) that are above their employer’s, that’s surely better? Ok, it’s not terribly woke to argue for the financial rights of middle-class millennials (even if they matter just as much as anyone’s). And if workplace pensions were some unequivocally great leveller when it came to long-term prosperity, then fair enough. They’re not. They’re based on contributions, so they grade people’s pensions based on their earnings and actually punish anyone who has to take time out of the system, such as parents or carers. The difference is that employees do not know these facts, and therefore are not making their financial choices with their eyes fully open. They’re not being allowed to.
And if someone is able to buy their own home using a LISA, why isn’t that a valid financial aspiration? If that means someone does not begin their retirement saving until a little later, does it matter, especially if they’ll almost certainly be working longer…possibly contributing more having sorted out their house deposit…actually investing more appropriately and aggressively than a mediocre default scheme?
This isn’t fantasy. In my job, I come across young people who are smart, self-motivated and going beyond the patronising notion that we don’t know what’s good for us. We are growing in number and confidence and if we only had more to work with,, there may be a real revolution in autonomous investing among the young in this country.
And if we can stick with our LISA, no matter what happens to us (part-time working, multiple jobs, going self-employed, becoming an avocado farmer in Chile), surely that’s preferable to a motley patchwork of abandoned pensions?
Because it’s not as if the government is remotely committed to introducing a system that will help us even see all our pensions, let alone make them portable, as demonstrated in the latest policy flip-flop from ministers who will be in post for all of five minutes.
The LISA isn’t perfect. I don’t actually think it’s the finished article. It could be the start of something much better. But we need to give it a chance. Having the LISA on the scene keeps an important conversation alive – one about our choices, our rights, the new reality of our working lives, the need for better information and financial empowerment for a whole generation. Thankfully, the Treasury says the LISA is here to stay and the Young Money Blog will do everything it can to make sure of it.