Tony Wickenden: Lifetime Isa offers glimpse into pension tax future

Tony Wickenden

Following the trend of those over the past few years, the Budget had plenty for financial planners to get stuck into. The “bigger picture” saw some interesting tax reductions and incentives being substantially funded by the continued war on aggressive tax avoidance.

Multi-national companies and their tax shenanigans have been in the news since Starbucks was hauled over the coals (not to mention the mocha) by Margaret Hodge’s public accounts committee.

Since then, we have seen the naming and shaming of many other household names in coffee (Café Nero), technology (Apple) and, well, pretty much everything you can buy (Amazon). We have also witnessed a concerted effort from Organisation for Economic Co-operation and Development members to counter base erosion and profit shifting. And, of course, we have our very own diverted profits tax.

This Budget brings additional measures to counter profit shifting and the use of losses and interest deductions by multi-nationals. These changes are scheduled to bring in some big bucks. The mantra appears to be: “We have reduced corporation tax but we will make sure it is paid.” There is also a scheduled attack on disguised remuneration and the use of “one-person companies” by those engaged by the public sector.

Thankfully, though, there was no radical action to increase the National Insurance take by removing the NIC saving on employer contributions to pension arrangements. This was one of the possibilities put forward by some pre-Budget in the wake of the realisation there was to be no fundamental pension tax relief reform at this time. There will also be relief the income tax and NI savings that can be generated by properly implemented salary sacrifice arrangements have survived.

So having taken a brief look at some of the Government actions to secure funds, what are the areas financial planners should engage in with their clients? Three major proposals to consider in relation to investment strategy are as follows:

  • The increase in the Isa contribution limit to £20,000 from 2017
  • The introduction of the Lifetime Isa
  • The reduction in capital gains tax rates from 28 per cent to 20 per cent for higher and additional rate taxpayers, and from 18 per cent to 10 per cent for basic rate taxpayers.

When added to the already known changes to dividend taxation and the personal savings allowance, received wisdom needs to be seriously reviewed.

The Lifetime Isa perhaps gives us a real glimpse of what the Chancellor is drawn to in relation to the future shape of retirement savings. In effect, it is a version of a taxed-exempt-exempt savings vehicle, with a flat rate incentive characterised as a cash bonus as opposed to tax relief. Osborne appears to have taken on board some key elements of the thinking of the Centre for Policy Studies.

The conditions are also interesting, only making it available to those that “start young” and ensuring the bonus has to be earned (much like what was proposed by the CPS in the shape of the workplace Isa) by leaving the amount invested until age 60. The exception, of course, is fund removal for the “valid cause” of a deposit for a first property purchase of up to £450,000 and, in some cases, of serious ill health.

“The Lifetime Isa perhaps gives us a real glimpse of what the Chancellor is drawn to in relation to the future shape of retirement savings”

The CGT rate changes will add fuel to the “do you need an Isa?” fire, which started with the introduction of the dividend allowance and the personal savings allowance, both taking effect from 6 April. The point here is, for many, the annual CGT exemption and the dividend/personal savings allowances will mean growth and income being tax-free anyway.

In response, one could argue that provided the Isa does not carry higher charges than unwrapped collectives it does give you the certainty of tax freedom, whereas the unwrapped alternative may require monitoring to ensure you stay within the allowances and exemption. And, of course,  the Lifetime Isa (if you qualify for one) secures you the government bonus.

The bonds versus collectives debate will also need revisiting in light of these latest proposals on capital gains together with the upcoming dividend tax changes.

Elsewhere, it is also worth noting the Red Book referenced two consultations we can look forward to on investment bond taxation (in the wake of the Joost Lobler v HM Revenue & Customs case) and on personal portfolio bonds.

Tony Wickenden is joint managing director of Technical Connection. You can find him tweeting @tecconn