The year 2006 heralded the introduction of pensions simplification: a term that has since been widely ridiculed due to the successive amendments to legislation. Recognition of this was made in the Government’s July 2015 consultation on strengthening the incentive to save, in which the role of tax relief in pension saving was questioned.
However, there was a further statement in the consultation’s foreword that begs closer investigation: “It is important that the support on offer from the Government is simple and transparent, and that complexity does not undermine the incentive for individuals to save.”
While we can all acknowledge the evolution of the current tax-relieved process of saving for retirement has been challenging to convey to the man in the street, it is arguably at its best understood now following the introduction of pension freedoms and the publicity surrounding automatic enrolment. Retirees have never had it so good with the options available and the chance to retain control over their income, investments and capital, and to pass on this wealth on death.
With the annual allowance of £40,000 and the lifetime allowance of £1m, the Government has catered for the needs of the many while kerbing the costs to the Treasury, thus aiding sustainability.
Having said this, pensions do have drawbacks – most notably the inability to access them before age 55 – and the Isa savings regime can play a vital part in the incentivisation of saving for periods and events for which a pension cannot cater.
In my opinion, the two should be able to run side by side, with clear boundaries as to their purpose. However, these boundaries have been blurred by the introduction of the Lifetime Isa.
This vehicle, to be introduced from April 2017, exhibits characteristics suitable for retirement planning, namely a Government bonus (equivalent to 20 per cent tax relief) conditional on the funds not being withdrawn before the age of 60. While the funds can also be used for homebuying, this facility was already available on similar terms through the Help to Buy Isa introduced in 2015.
“We are at a very real risk of introducing a regime that, through its change and complexity, might already be viewed by some as too daunting”
Many commentators have described the Lifetime Isa as the introduction by stealth of a pension Isa. Another indicator might be the direction successive governments are pushing savings.
Since 2006 the annual allowance for pensions has fallen from £215,000 to £40,000 (a drop of over 80 per cent), while Isa savings allowances will have risen from £7,000 to £20,000 by April 2017 (a rise of over 280 per cent).
Many believe the Lifetime Isa is the beginning of the end for the current tax-relieved method of pension funding. But if this apparent direction is followed, is the Isa regime any less complicated than the pension regime it might replace?
Since Isas were first introduced in 1999 (subsuming personal equity plans, which were introduced in 1986) they have also evolved almost beyond recognition. It was then-Treasury economic secretary Ed Balls who cemented the future of Isas back in 2006 with his announcement they would have a permanent future, rolling in the old Pep allowances and introducing the first of many changes, the removal of the mini/maxi and Tessa only Isa distinctions.
Since then we have had numerous increases in allowances, as well as the introduction of Cash Isas, Stocks and Shares Isas, Junior Isas, Help to Buy Isas, Flexible Isas, Innovative Finance Isas and now the Lifetime Isa. We are now able to transfer between Isas, withdraw and replace funds and leave Isas to spouses. Is it just me or are all these changes and options confusing?
But that is not the end. The Centre for Policy Studies’ Michael Johnson, who is widely regarded as the creator of the idea for the Lifetime Isa, has already lobbied for changes to it. It is his belief the current allowance of £4,000 should be doubled to £8,000 and the Government bonus increased from 25 per cent to 50 per cent (effective to a tax relieved rate of 33 per cent). All this before the new Isa has even become active. He has also campaigned for a workplace Isa, targeting a savings regime currently served by auto-enrolment.
We are at a very real risk of introducing a regime that, through its change and complexity, might already be viewed by some as too daunting. This is at odds with the goal of creating simplicity and with it the understanding and trust needed for individuals to commit to save.
Martin Tilley is director of technical services at Dentons Pension Management