I am not being controversial when I say a pension wrapper is the most tax-efficient vehicle for retirement planning. So it was somewhat surprising to see them not even get a mention in HM Treasury’s recent Ways To Save In 2017 infographic. This omission – post-Christmas oversight or not – will fan the flames of pre-Budget speculation surrounding pensions even earlier this year.
With this in mind, how might the Lifetime Isa fit into retirement planning for those under 40 eligible to apply?
It’s an age thing
Back in 2014, then-chancellor George Osborne announced the normal minimum pension age would be pegged at 10 years below the state pension age by 2028.
Although the legislation to enact this has been left out of two subsequent Finance Acts (assuming this is not another oversight) by the time the first cohort of Lifetime Isa investors reach age 60 and can access it free of penalty, the minimum retirement age for pensions will be 58.
Not only can Lifetime Isa funds be withdrawn from age 60 free of income tax but the lifetime allowance will also not apply. Therefore, younger clients and advisers worried about future lifetime allowance issues could consider accumulated Lifetime Isa funds as another source to top up any retirement income free of tax.
Payments vs subscriptions vs contributions
From 6 April, the Isa subscription allowance rises to £20,000.
Rather than the traditional “subscription” to Isas or “contributions” to pensions, money paid into a Lifetime Isa will be known as “payments”. The annual payment limit for those eligible to apply for a Lifetime Isa will be £4,000 in 2017/18.
The Lifetime Isa manager will then apply for the government bonus of 25 per cent, topping up a £4,000 payment by £1,000. This will be at the end of the year for 2017/18 and on a monthly basis thereafter.
For a new cash payment into a Lifetime Isa, or the transfer in of current year subscriptions to a cash or stocks and shares Isa, the £4,000 payment will count towards the overall Isa subscription limit.
However, if a client chooses to transfer in £4,000 from an Isa relating to subscriptions made in a previous year, then they still receive the £1,000 bonus top-up by using their full Lifetime Isa payment limit and will still have their full £20,000 Isa subscription allowance to use for 2017/18.
So they could get a £1,000 bonus top-up without having to commit new cash each year if they use this transfer facility annually.
Simple vs complex
We might never know how close the full pension Isa really was but it is clear the Treasury believes the Isa brand is trusted by consumers; largely due to the perception it is fair, simpler and easier to understand than pensions.
That said, the introduction of the Innovative Finance Isa has thrown this generalisation into doubt. Just look at the FCA’s recent thoughts on the suitability of peer-to-peer lending for retail investors, particularly within a “trusted” Isa wrapper.
The 25 per cent withdrawal charge on the Lifetime Isa has rightly been criticised and this, alongside concerns over people opting out of workplace pensions, features heavily in the FCA consultation on the regulatory framework for it. Do these concerns mean the Lifetime Isa is also in danger of straying into the realm of the complex, away from the trusted simple brand on which it is based?
Despite these drawbacks, and even with all the mandatory risk communications at outset and throughout the life of the product, some investors will probably still plump for a Lifetime Isa over pension contribution in the years ahead.
So a Lifetime Isa is not a pension, nor is it an outright replacement for one. But there may be some future planning opportunities for a segment of existing clients or the next generation coming through. I do not really believe those with significant Isa pots and potential lifetime allowance issues really were the intended beneficiaries of this policy, though.
Aside from the withdrawal charge level, one huge question mark remains over the Lifetime Isa: can future governments really be trusted not to tinker with the tax-free status after age 60?
While the tax treatment of death benefits from pensions remains so generous, the answer may actually be yes – for now.
Charlene Young is technical resources consultant at AJ Bell