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New Millennials study uncovers potential of miss-buying LISAs for retirement saving, finds new Dunstan Thomas nationwide study.

23 January 2017

Auto-Enrolment opt out rates set to double in last year of enrolment.

The Financial Conduct Authority’s worst fears could be realised if large numbers of millennials choose to buy Lifetime ISAs (LISAs) because they see them as offering a more flexible, and in some cases more tax efficient, retirement savings vehicle than workplace pensions, according to a nationwide study of 1,000 millennials conducted in December by Opinium Research for financial services technology business Dunstan Thomas.

Whilst 27% of millennials thought that the LISA is a more tax efficient retirement savings vehicle than an Auto-Enrolled workplace pension, a further 38% were unsure which product was more tax efficient. The need for financial advice loomed large as a quarter (25%) of millennials indicated that they might take out a LISA as a retirement savings product. A total of one third (32%) of millennials aged 23-36 anticipated taking out a LISA from April when they come available.
A total of 20% of millennials said they were quite or very likely to opt out of an Auto Enrolment (AE) workplace pension scheme when they are offered the opportunity to do so, suggesting a near doubling of opt out rates this year as employees of SMEs and micro businesses reach their staging date. One can only speculate whether AE opt out rates may spike because of the introduction of the LISA this year.

For millennials who are saving anything at all (81% of them), just a fifth (19%) are making additional provisions for their retirement over and above prescribed employer or state pension scheme contributions. Retirement saving finds itself fourth top savings priority for millennials; behind building ‘a rainy-day savings fund’ for 38% and saving for a nice holiday for 29%. While saving towards a deposit on their first home is a saving priority for 26% of saving millennials. Additional retirement saving only came in ahead of saving up for ‘large household items’, for 16% of savers, and for a new car (for 12%).

Despite the lack of prioritisation of retirement saving, four-fifths (82%) of older millennials aged 30-36, that plan to build up a sizeable retirement pot, believe they will have done so by the age of 65. Younger millennials aged 23-29 were even more optimistic – 86% believing that they will have addressed this need by the current state retirement age of 65.

Millennials working full-time and currently saving, save on average £191.33 per month. An average of £161.65 per month is put aside by saving millennials across all socio-economic groups. Those working part-time (up to 29 hours per week) set aside an average of £87.42 each month. Indicative findings* suggest that the average millennial living in Northern Ireland saves the least of all UK regions – just £58.32 per month, whilst in Wales they set aside £91.34 in a typical month. However, Londoners’ savings pots are the most bountiful with £208.52 being set aside each month.

Older Millennials are struggling with their savings habits as pressure on their wallets increases in their 30s: 40% of 30-36 year olds are either saving irregularly or not at all; while 35% of 23-29 year olds are failing to put any cash away regularly.

Adrian Boulding, Director of Retirement Strategy at Dunstan Thomas, explained: “Our Millennials Study results show that there is clear danger of the millennial generation buying the LISA for the wrong reasons. To those of us in the industry it might look like a highly flexible savings vehicle geared to one of their financial goals – getting on the housing ladder.

“But our findings indicate awareness of the product amongst the target audience is low and they may well decide to use the LISA to save, apparently more flexibly, for retirement. And having done this, they may even opt out of their workplace pension scheme which is, in the main, a much better way to save for retirement than a LISA because pensions enjoy matching employer contributions.”

The Dunstan Thomas survey also probed preferred capabilities and functionality that millennials would most like to see in new smart phone-ready, highly interactive apps which Dunstan Thomas is developing for product providers. The next generation of customer engagement tools will help consumers make better financial choices engendering healthier saving habits, while enabling providers to understand and engage more deeply with their customer-base.