In his recent “Budget for the next generation”, Chancellor George Osborne unveiled the Lifetime Isa as a more flexible way for younger people to save over the long term. Instead of choosing whether to save for a home or a pension, the Lifetime Isa has been pitched as a way for people under 40 to do both, subject to a £4,000 annual limit. The Government will top up investments through a 25 per cent bonus.
The move has been widely heralded as changing the face of savings. However, some in the industry suspect the Chancellor has ulterior motives. They see it as no coincidence the Lifetime Isa appeared as the Chancellor pulled back from changes to pensions tax relief – and a potential move to a pension Isa system – so as not to rock the boat ahead of the EU referendum.
So could the Lifetime Isa be a tactic to soften up the public for a future pension Isa system? Could it be a threat to traditional pensions, particularly automatic enrolment? Or is it just a well-intended move to boost savings among younger people?
Creeping towards a pension Isa?
Dentons Pension Management director of technical services Martin Tilley believes this is “without doubt” the introduction of a pension Isa by stealth means.
He says: “It’s actually quite clever because everyone was thinking about a ‘big bang’ switch from one regime to another, whereas there is scope for these regimes to run in parallel and for the terms to gradually be altered to favour the pension Isa route.
“I can see gradual extensions to the age ranges for Lifetime Isas, requirement for contributions to them to be offset against someone’s pension allowance and then the slippery slope towards full-on pension Isas.”
Lane Clark & Peacock senior partner Bob Scott agrees the Chancellor could be viewing the Lifetime Isa as a trial run. He says: “If it proves attractive Osborne will be able to say ‘we tried a soft launch and look how successful it is. I’ll switch off tax relief on pensions and people can save in this instead’.”
However, some are not so sceptical. Talbot and Muir head of pensions technical Claire Trott recognises the danger the new product could be a precursor to a pension Isa system but ultimately feels it is more likely both products would be run alongside each other.
She says: “If it is popular, then it could be used as an excuse to move over to another system but it is such a dramatic move away from the current system, it would still cause outrage.”
“The fact that it is presented as a 25 per cent bonus versus 20 per cent tax relief will certainly confuse some into thinking the Lifetime Isa is more attractive”
Walker Crips executive director, wealth management and pensions David Hetherton agrees, highlighting future tax technicalities. “I don’t think it is a taster for a full pension Isa system as the Lifetime Isa allows you to take tax-free withdrawals after age 60. That’s a big loss in tax revenue for the Treasury if this was extended to be a full pension Isa allowing a greater amount to be saved each year.”
Who is the fairest of them all?
One of the most prominent fears within the industry is the apparent attractiveness of the Lifetime Isa, particularly the element that allows funds to be withdrawn to use towards a deposit for a first home, poses a dangerous threat to future retirement saving as a whole. Could this move signal the death of pensions as we know it?
Intelligent Pensions marketing director Andrew Pennie says the Government has been clever to introduce a bonus of 25 per cent on contributions to Lifetime Isas that is the equivalent to the existing 20 per cent basic rate tax relief on pensions.
“The fact that it is presented as a 25 per cent bonus versus 20 per cent tax relief will certainly confuse some into thinking the Lifetime Isa is more attractive,” he says.
However, he says it is important for consumers to realise there are many advantages to a pension compared to a Lifetime Isa, such as receiving employer contributions and higher-rate tax relief. He adds many people will also need to save more than the maximum Lifetime Isa contribution to achieve their retirement objectives and wonders why anyone would use it to save after the age 50 when the Government stops adding bonuses.
Old Mutual Wealth retirement planning manager Adrian Walker points to other advantages the current pensions system has over the Lifetime Isa, such as the ability to make up lost ground on funding with the carry forward of unused annual allowance provisions. But he, like many others in the industry, sees auto-enrolment as one area most under threat.
A collision course with auto-enrolment?
Former pensions minister Steve Webb, who was charged with the task of implementing auto-enrolment when the coalition came to power back in 2010, is very concerned.
He says: “I would go so far as to say when it comes to improving workplace pension coverage we are in danger of snatching defeat from the jaws of victory.
“Just at the point we have got literally millions more people starting to save in a pension via auto-enrolment and benefiting from an employer contribution, there is a real danger they will be diverted into a shiny new product which looks attractive but which has no employer top-up.”
For Webb, now director of policy at Royal London, the risk is the Chancellor will actively promote Lifetime Isas, leaving auto-enrolment to trundle on quietly in the background. He says the nightmare scenario would be if people continued using Lifetime Isas for retirement saving past age 50, when they will not get a Government top-up.
Trott is also conscious of the huge potential risk. “Tempting people to opt out of auto-enrolment schemes, with the offer of flexibility when the penalties for accessing the funds are so high, seems like a car crash waiting to happen,” she says.
However, Pershing head of wealth client solutions Nick Stebbing believes the new product will not actually have much of an impact.
He says: “Auto-enrolment is shown to benefit most significantly from inertia. There will be a few people who opt out of auto-enrolment to put money into a Lifetime Isa but I expect they will be few and far between.”
At a glance: Lifetime Isas
- Eligible for savings of up to £4,000 a year, which will qualify for a 25 per cent Government top-up or ‘bonus’ up to £1,000 a year
- A Lifetime Isa can be opened between the ages of 18 and 40. The Government top-up is only on contributions prior to a saver’s 50th birthday
- Accounts will be available from April 2017
- Savings can be used towards a deposit on a first home worth up to £450,000
- Accounts are limited to one per person, not one per household
- Those with Help to Buy Isas can transfer savings into a Lifetime Isa in 2017, or continue saving into both. Only the bonus from one account can be used to purchase a property
- For retirement, all savings can be withdrawn tax-free after age 60
- Money withdrawn before age 60 will see savers lose the Government bonus plus interest and growth. Savers will also be forced to pay a 5 per cent penalty charge
- Government is considering whether to allow Lifetime Isa funds to be withdrawn in full for other life events beyond buying a home. If savers are diagnosed with a terminal illness, they can withdraw the funds tax-free regardless of age
- Government will also consult on adopting a model similar to US 401K plans, where savers can borrow against their Lifetime Isa funds but do not incur a penalty charge
if funds are repaid