Thinking of investing in your employer’s Workplace Isa scheme? Here’s your guide
From a simple savings account to a product that helps you buy your first home, we are not short of Isas to choose from.
And with 10.8m adults subscribed to at least one type of Isa in the last tax year, they’re also very popular.
But, unless your employer offers it, there is one type of Isa that you might be unfamiliar with: the Workplace Isa.
It works in a similar fashion to the Stocks and Shares Isa in that you invest in the stock market, savings are subject to the £20,000 annual Isa allowance, and investment growth and capital gains are free from tax.
The big drawbacks are that your employer selects the provider, and you might have limited choice when it comes to the underlying investment options.
But Workplace Isas also come with a few extra benefits.
Perks of the job
First, contributions are deducted from your salary, which appeals to employees who want convenience.
Second, you can link it to other products. More than 12 per cent of employees who have a workplace pension with Hargreaves Lansdown also save through one of the company’s Isa offerings, which suggests that savers find it useful to have their savings with the same provider. By having their money in one place, they can track all their savings more easily via the online portal.
Drip-feeding money into an Isa directly from a paypacket every month is also likely to increase the amount people save overall. As Ronnie Taylor, chief distribution officer at Aegon, points out: “A Workplace Isa can promote regular savings habits, and – just like pension contributions – build up your pot over time.”
By far the biggest benefit is the cheaper cost. According to Steve Watson, head of proposition at workplace savings platform Smarterly, deals are negotiated by the employer, creating economies of scale, and resulting in an annual management charge that is a lot less than the retail cost.
And ultimately, lower fees allow your savings pot to grow faster.
Given that the employer will have gone through the due diligence process on your behalf in order to check that the Isa provider is credible, Workplace Isas also save you from doing your own research.
The benefits don’t end there. Nathan Long, senior analyst at Hargreaves Lansdown, says that employers which successfully operate Workplace Isas tend to pair them with employee financial education.
“Generally speaking, investing in the stock market is poorly understood, so helping people understand the potential benefits of investing in shares rather than cash is crucial.”
To put this into context, Long points to a survey which found that only 27 per cent of savers thought that their workplace pension scheme was invested in the stock market. So while the products themselves are useful, it’s giving people the confidence to invest that is truly invaluable.
The pension conundrum
The question now is how a Workplace Isa fits alongside your pension.
While a Workplace Isa is similar to a pension in that money is deducted straight from your salary, the two vehicles are treated differently in tax terms. Isa savings are transferred from post-tax income, while pensions are not. Pensions also benefit from generous tax relief on both investment growth and personal contributions.
Crucially, though, you don’t have to wait until you hit retirement age to access the money from your Isa, making this savings pot far more flexible.
While this might make the Workplace Isa sound more appealing, Taylor stresses that a workplace savings scheme shouldn’t be viewed as a replacement for a pension.
“We see a pension and a Workplace Isa as complementary savings vehicles,” he says.
When you take the employer contributions into account as well, a pension is usually your most valuable savings pot. As a result, you should see your pension as the core savings vehicle, and use your workplace Isa to save any extra disposable income.
Taylor adds: "Employers need to help employees understand the difference between the two, and which is more suitable for different goals"
It’s a match
Over recent years, the government has reduced the tax-free pension allowance, putting more savers at risk of exceeding the threshold and being lumbered with a hefty tax bill.
As Watson explains: “Since the introduction of the tapered annual allowance, a lot of higher earners are restricted in the amount that they can pay into a pension.”
But by having a Workplace Isa, employees can max out their pension contribution and then divert the balance into the Isa. “Without this dual scheme, higher earners would lose out on employer pension contributions,” he adds.
But the Workplace Isa also encourages everyone in the workforce to start saving – crucial given the dismal level of savings among the British population.
Rather than using it for retirement, younger savers would probably prefer to use a Workplace Isa to save for a shorter-term goal, such as building a deposit to buy a first home. In turn, that gets them used to the idea of saving for later in life.
“Isas can help with increasing savings and engagement with financial products,” says Long, adding: “A dual approach helps people to be able to save for retirement, while still saving for shorter and longer-term financial requirements. And, of course, with an Isa you have access at anytime, whereas with a pension it is locked away until age 55.”
End of an Isa?
If you're wondering what happens to your Workplace Isa if you leave your job, it's simple: your account effectively becomes a regular Stocks and Shares Isa.
The savings account is registered in your name, so – just as you still have access to your workplace pension when you leave a job – the money held in the Isa is yours.
Of course, these payments will no longer come directly from your salary, meaning you will have to set up a direct debit if you want to continue to contribute every month.
Missing a trick
While the idea of a Workplace Isa had been mooted by government several years ago, it was the Lifetime Isa that was eventually unveiled by George Osborne in the 2016 Budget.
The Lifetime Isa was met with criticism for causing confusion among savers. But there was also a sense of disappointment that the government had not taken the opportunity to create an Isa that linked to auto-enrolment.
Back in 2016, the man behind the Lifetime Isa, Michael Johnson from the think tank The Centre for Policy Studies, called for a Workplace Isa to sit inside the Lifetime Isa and be able to receive employer contributions as well as the 25 per cent government bonus.
Rather than replacing pensions, Johnson’s plan was for the Workplace Isa to serve as an alternative option for savers, giving employees choice about where their pension contributions go.
His idea never came to fruition, and some industry figures like Watson argue that the government missed a trick by not making a Lifetime Isa an approved vehicle for auto-enrolment in order to help address the savings crisis in the UK.
Some think that there is still scope for this to happen, while others argue that it could create yet more complexity and further overwhelm savers.
Regardless, there’s a lot to be said for companies encouraging their employees to invest.