Many in the industry will have sighed in relief a week or so ago when briefings confirmed there would be no changes to pension tax relief. However that may have been premature.
Despite the Chancellor saying during his Budget speech that moving to a new system is not on the agenda as there is no clear consensus, he is introducing a new Lifetime Isa which can be set up by those under age 40. This feels very much like a back-door move towards his preferred pension Isa solution.
The new Lifetime Isa, or LISA as it will no doubt be christened, aims to help younger people save towards a first home and their retirement within one plan.
People will be able to save up to £4,000 a year, and the Government will add in a “bonus” of up to £1,000, although that bonus is only available up until age 50. Contributions will sit within the new overall Isa allowance of £20,000 a year.
People can withdraw funds tax-free, including the bonus element, to buy a first home up to the value of £450,000 at any time from 12 months after opening the account. Alternatively funds can be withdrawn tax-free from age 60, or in cases of terminal ill health. There is flexibility to withdraw funds at other times but, in those situations, the bonus funds are lost and a 5 per cent charge is levied.
For younger people this may well prove more attractive than a pension, as the money is accessible for buying a first home, or if they believe they need it for other reasons. Which raises the possibility some may opt-out of their auto-enrolled pension scheme to save in this alternative.
Losing the benefit of the employer pension contribution would likely make this a poor outcome, but the attraction of access may win out, unless people are higher rate taxpayers.
If this new LISA takes off and is successful, moving all pension saving to this format would seem inevitable.
There were a number of other pension related changes, which generally fell into the “good” camp. A strange rule meant dependants under age 23 were to some extent excluded from the pension freedoms, having to use inherited funds by age 23 or face a hefty tax charge.
This is changing to allow these dependants to keep money in the pension wrapper until they actually need it, and helps people cascade pension wealth down through the generations in a tax-efficient way.
Employers who want to help pay for their employees to receive advice will see the first £500 eligible for tax relief rather than the previous limit of £150. And a consultation over the summer will look to put in place rules which allow people to withdraw £500 from their pension tax-free before the age of 55 to help pay for advice.
This was a quieter Budget – both for pensions and in general – than recent years. But it has potentially huge ramifications for long-term savings in the UK
Andrew Tully is pensions technical director at Retirement Advantage