Despite repeated public claims from Government officials that pensions are here to stay, it is clear to anyone in the industry that the direction of travel is towards Isas as the primary long term savings vehicle.
New products are being created, allowances are being increased and the mantra is ‘pensions are complicated, Isas are simple’.
Personally I think pensions are still the best long term financial planning vehicle but, regardless of your personal views, financial planners are increasingly having to weigh up the Isa – Pension conundrum.
In any comparison, one fact that should not be over looked is inheritance tax and on this front, the new Lifetime Isa is a nightmare waiting to happen.
Let’s rewind a bit.
The attraction of the pension freedoms regime was two fold. Firstly, there was the perceived freedom not to have to buy an annuity (although in reality this was already the case).
Secondly, we had the somewhat surprising and controversial changes to the taxation of death benefits.
The removal of the 55 per cent tax on crystallised funds for death prior to age 75 and the ability to pay money out at the marginal income tax rate of the recipient means that, with some careful planning, pensions have never been so IHT-efficient.
In effect, a pension fund such as a Sipp becomes a tax-efficient family trust fund that can be passed on down the generations to a variety of beneficiaries.
Encouraging money to be kept in the pension wrapper could well assist in preventing early encashment from that wrapper. Indeed, I recall a few months before the pension freedoms were launched last year, the now pensions minister made a keynote speech suggesting it might be better to spend your Isa funds and even sell your house, leaving the pension as the tax wrapper of last resort, due to the IHT efficiency.
Roll forward a year and Isas are being touted as the pension plans of the future. Isas are different, contributed to from taxed income, with withdrawals made tax-free (subject to any specific Isa rules such as with the new Lifetime Isa) – so taxed exempt exempt.
Pensions are complicated and Isas are simple, so we are told.
Would it not be good for pensions to be more like Isas? But, and it is a big but, Isas are included in the individual’s estate on death and could give rise to an IHT charge.
The Government forecasts the tax take from IHT receipts will increase from £3.8bn last year to £5.6bn in 2020/21. It also comes hard on the heels of figures from HMRC showing they took a record amount of IHT in 2015/15, £4.6bn up from the £3.8bn taken last year.
In many cases IHT has been described as a voluntary tax which can be mitigated with a bit of forward planning. It is arguable that one of the easiest bits of planning is to have it in a pension on death.
If a 25-year-old started a Lifetime Isa and contributed the £4,000 per annum limit plus the £1,000 bonus from the Government and it grew at 5 per cent a year the value at age 60 would be in the region of £416,000.
This amount would already be in excess of the current IHT threshold without taking into account any other assets – and, presumably, there would need to be other assets, as this may well not be enough to sustain an income through to age 90 or above.
So, in my comparison of pension v ISA there would be a big negative in the Isa column for intergenerational planning.
Mike Morrison is head of platform technical at AJ Bell.