It's a dilemma that will be familiar to many 20- and 30-somethings: you know you need to save for retirement, but you also have pressing financial commitments in the shorter term, from paying off university debt to buying a first property. Asos, the online fashion retailer, aims to help its staff confront this problem with an innovative new employee benefits package.
The Asos scheme will still require staff to contribute the minimum allowed sums to a pension plan, currently 3% of pay, and it will comply with its minimum employer's contribution of 2%. However, staff will then have the option of allocating additional contributions of their own and from Asos in different ways, either to their pension, or to more flexible and accessible savings schemes. The retailer is still consulting on the detail, but sees employees being offered a range of products, including tax-efficient individual savings accounts (Isas) and lifetime Isas.
A mixed reception
For an employer with a relatively young workforce, offering a scheme such as this is an exercise in recruitment and retention strategy. But from a financial-planning perspective, it highlights a contradiction financial advisers and savers alike have long wrestled with. On the one hand, the conventional wisdom is that, since so many people don't save enough for retirement, every spare penny should be ploughed into pension savings. On the other, this ignores the realities of the financial pressures on young people.
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In this context, the Asos initiative has received a mixed reception from the pensions industry, with people applauding the retailer's intent, but also insisting that pension planning should be savers' overriding priority.
However, there is a more optimistic way to look at this conundrum. Products such as Isas offer very similar tax efficiencies to pensions with greater flexibility, and can be a great way to meet perfectly valid savings goals. Sensible savers review their financial planning regularly and adapt as their circumstance allow once they've met a shorter-term objective, it should be possible to increase pension savings.
The bottom line is that few savers can do everything they'd like to straight away, particularly in their 20s and 30s, when they're unlikely to have achieved their full earnings potential. In practice, they need flexible savings options to help them achieve a broad range of goals, whether those options are all available from an employer or arranged independently.
Lifetime Isas have slow first year
Asos's plans to offer lifetime individual savings accounts (Lisas) could help to accelerate interest in a savings scheme that has had a slow start since its launch in April 2017.
Lisas are open to savers aged between 18 and 39. If you qualify, you can invest up to £4,000 of your £20,000 annual Isa allowance in a Lisa, with the government adding a 25% bonus on top. The money can then be invested in cash or other assets, depending on the provider you choose.
Yet despite the appeal of a government top-up, Lisas have not yet proved wildly popular. Over the past 12 months, only 140,000 accounts have been opened, according to savings analyst Moneyfacts. The slow take-up can partly be explained by the fact that not many providers offer Lisas at the moment, only Skipton Building Society offers a cash Lisa, while three brokers (AJ Bell Youinvest, Hargreaves Lansdown and The Share Centre) offer a self-select investment Lisa. Other reasons may be that people find them overly complicated, or the punitive withdrawal penalty of 25% if you withdraw cash before the age of 60 and don't use the cash to buy a house. However, with more providers set to launch Lisas later this year, it may be that as people become more familiar with the idea, and are given more choice, uptake will improve.
Robbing grandad to pay junior makes no sense
In its recent report, the Resolution Foundation think tank proposed replacing inheritance tax (IHT) with a lifetime receipts tax, and introducing a £10,000 "citizen's inheritance" that would be given to all 25-year-olds in a bid to address inter-generational inequality.
The debate surrounding intergenerational inequality is built on the assumption that older Britons are sitting on considerable housing wealth and enjoy generous private pension income. But while that may be true in some cases, official data suggests it is far from a complete picture. For example, 60% of over-65s show signs of "financial vulnerability"(ie, they may suffer disproportionately in the event of divorce or a bereavement, for example), warns the Financial Conduct Authority. By contrast, the regulator put the figure at 47% among Britons aged 25 to 34. Similarly, income inequality has recently increased between older people as well as compared with younger people, suggests the Office for National Statistics. Moreover, even wealthier pensioners may not remain well-off given the cost of long-term care.
There's also the odd logic of trying to combat inequality via a £10,000 handout that isn't means-tested. That said, the Resolution Foundation's desire to fund this handout using tougher IHT rules could arguably level the playing field between families wealthy enough to leave substantial sums and those not in that position.
Tax tip of the week
Generally, expenses that aren't incurred for business purposes are not tax deductible. However, HM Revenue & Customs allows businesses (companies and unincorporated businesses) to claim deductions for certain costs incurred when working unpaid for charities or in other situations, says the Tax Tips & Advice newsletter. This can include the cost of stock, employees' wages and expenses, and the gift of equipment as long as, if it were used in the business making the gift, it would qualify for capital allowances. Given that sole traders and business partners aren't employees of their business, these rules don't apply to costs they incur when working for a charity. To avoid doubt, you may want to ask the charity to reimburse these costs, and then donate the money back to them via the gift-aid scheme.
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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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