Months of speculation about pension tax relief reform was silenced shortly before the Budget when Treasury sources told the media it was “not the right time” for such changes.
Much to the relief of providers, the rumoured pension ISA or shift to flat rate relief was not going to happen.
However, things were not to remain completely unchanged in the tax-exempt savings arena.
George Osborne used his 2016 Budget to introduce the Lifetime ISA (LISA) designed to encourage younger savers to save for retirement or a house deposit.
People under 40 will be able to save up to £4,000 a year tax-free into a LISA, and for every £4 deposited the government will add a further £1. The bonus will be available until savers are 50-years-old and the money accessible without penalties at 60.
Savers will be allowed to withdraw LISA cash at any time before they turn 60 to buy a property. If the cash is taken out for any other purpose they will lose the government bonus (and any interest or growth on the government bonus) and will also have to pay a 5% charge on the remainder.
Once the saver hits 60, they can take out all the savings tax-free.
The measure will take effect from April 2017. Any contributions to a LISA will sit within the newly increased annual £20,000 ISA limit
Osborne said the LISA will help the younger generation, known for not saving enough, to increase their savings.
He told the House of Commons: “You don’t have to choose between saving for your first home, or saving for your retirement. With the new Lifetime ISA the government is giving you money to do both.
“For the basic rate taxpayer, that is the equivalent of tax-free savings into a pension, and unlike a pension, you won’t pay tax when you come to take your money out in retirement.
“For the self-employed, it’s the kind of support they simply cannot get from the pensions system today.”
Statement of intent
For many, it seems as if the LISA is the first step towards wholesale pension tax relief reform and the introduction of an ISA-style taxed-exempt-exempt system for retirement.
Walden Capital Chartered financial planner John Stirling said: “The LISA allowance isn’t large enough to be life changing and it is a good way of encouraging young people to save for a house.
“My worry is that it is the first step towards a pensions ISA. There used to be a good pensions regime in the UK and the pensions ISA would do away with that.”
Hargreaves Lansdown head of retirement policy Tom McPhail added: “As anticipated the Chancellor has left pension tax relief alone, so there is still a big upfront incentive to save into a pension, particularly where there is an employer contribution too.
“We are mindful that we haven’t yet had a formal response from the Treasury to the pension tax consultation and that over the longer term, the new LISA could yet evolve to replace the pension system.”
Gale and Phillipson head of distribution Phil Morris said on a superficial level, at least, the LISA was a welcome newcomer to the savings market and would get younger people saving.
“Though, on closer inspection, we might question how far this will go to achieving that goal in practice. The £4,000 limit can hardly be seen as a substantial alternative to a pension pot, or deposit towards getting on the first rung of the housing ladder,” he said.
“In addition, the new ISA will carry the caveat of a hefty 5% charge on any withdrawal made to cover anything other than a ‘pension’ or house purchase.”
Intelligent Pensions managing director Steve Patterson thought the idea was commendable and would help the next generation save more.
“Provided it doesn’t increase the opt-out rate from auto-enrolment – which remains to be seen – it’s as much as a government could be expected to do,” he said.
“Obviously, there will need to be some clawback system to stop people churning their savings each year, but the fact that people are being incentivised to save more without the worry of their money being locked up until retirement is a positive measure.”
He added: “It should also encourage those who take advantage to learn more about investing, as there is unlikely to be any requirement for a default investment requirement, as we have for auto-enrolment.
“It is interesting the government have set the retirement access age for the LISA at 60 which is beyond the proposed access age on pensions of 58 in 2028.
“This looks a sure sign that pension access will be pushed back to 60 in due course to level the playing field.”
Aspect 8 Chartered financial planner Claire Walsh was positive about the LISA and predicted older people funnelling money to younger family members.
She told RP: “This is an excellent measure for people who can’t get on the property ladder. Most of my clients are older and wealthy and many of them ask me how they can help their children save for a property.
“I will be advising them to gift income to their children using the LISA. This was a very socially aware budget and this measure will help redistribute income between the generations.”
Sbn Wealth Management financial adviser Dan Farrow agreed wealthier, older people would be funding LISAs.
“It is a great idea, but aimed at an age range that doesn’t have a disposable income. These ISAs will actually be used by wealthy parents and grandparents putting money into their children’s accounts,” he said.
“These people will already be using the pension rules to ensure money is passed onto their children. My high-net-worth clients will benefit from this new rule.”
Towry head of estate planning Ian Dyall agreed the older generation wanted to help their children and grandchildren save tax efficiently.
“The IHT gifting annual allowance is £3,000 per person per year. A couple could, therefore, give their child or grandchild £2,000 each to put into the LISA and this would not be subject to inheritance tax.
“This is already possible with a pension but the saver is not able to access the money.”
Roxburgh Financial head of investments and pensions Rob McMurrich said the LISA should form part of a blended approach to long-term saving.
“It should encourage those with the ability to save, but who have reservations about making long-term financial commitments, to act now knowing that they have freedom and flexibility in the future.
“My hope is that this will be used as a blended approach for short-term commitments in conjunction with traditional pension savings and upfront tax relief.”
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Later Life Academy chairman Bob Champion said measures announced in the Budget 2016 were the start of a “quiet revolution” in long-term savings.
He said: “Firstly, we have the acceptance by the government of the Financial Advice Market Review recommendations and the increase in the tax and National Insurance contribution relief available for employer-arranged pension advice from £150 to £500 from April 2017.
“Secondly, we will have the introduction of the pensions advice allowance over the summer of 2016 which will allow people to withdraw £500 tax-free before the age of 55 from their defined contribution pension to redeem against the cost of financial advice.
“Then we have the realignment of publicly-financed guidance services including the abolition of the Money Advice Service.
“All this will certainly encourage and aid the public to make more use of financial advisers, and that has to be a real positive.
“Add in the introduction of the LISA and we have government acceptance that the average saver often has conflicting objectives when locking away money in a pension and that, when it comes to retirement planning, there needs to be a much wider consideration rather than just what is in the pension pot.”