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Tony Wickenden: Should Help to Buy Isa’s incentive method extend to pensions?

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One of the big headline grabbers from last month’s Budget was the Help to Buy Isa. Like pension freedom, a superficially easy concept to present and understand.  Also like pension freedom, however, there is a little bit more detail to get to grips with. The most obviously available further information on the Help to Buy Isa was its short factsheet but this left more than a few questions unanswered. A bit more searching turned up a more detailed overview of how the scheme will work in practice, which includes information on eligibility criteria, when the Isa will be available to savers and how its implementation will be taken forward.

This moves us considerably further on than the factsheet but still leaves a few unanswered questions. The aspiration is that the Help to Buy Isa will “go live” this autumn, so we could expect legislation and regulations after the election in a second Finance Act. However, this may be dependent on who wins. It may well be one of the provisions that does not get implemented if the Conservatives are not victorious. It will definitely come under the microscope.

Many have questioned whether it is an appropriate use of government funds, especially in light of questions raised over whether the idea will achieve the obvious objective of helping first time buyers to buy. Some have suggested the Isa could actually be an engine driving further increases in prices. The argument runs like this…

Help to Buy Isas provide government assistance for purchase through the tax-effective funding of a deposit. This, in turn, increases demand. Supply (of first time buyer houses) is not increasing enough, according to commentators.  Increased demand and static supply means further (upward) pressure on prices, thus making the fundamental objective even harder to achieve.

The alternative, say some, is to direct funds to schemes promoting increased supply. This would then cause (in theory, at least) downward pressure on prices. 

Regardless of the unavoidable uncertainty regarding its introduction, there is little doubt those who could qualify will be interested in knowing how the proposed scheme is to work. As such, advisers need to know.

Before looking at the scheme in as much detail as we can at this stage, I find it interesting we see a live proposal where the tax incentive is articulated as such, an additional government contribution, rather than formal tax relief.

You may recall that this method of incentivising has been suggested by some in relation to pensions generally – i.e. ceasing tax relief and replacing it with an “incentive payment” of £1 for every £2 contributed to a maximum invested contribution of £8,000. So, with the £4,000 of government incentive, this would mean that up to £12,000 would be invested, with £8,000 from the investor and £4,000 from HMRC.

It is thought by the proponents of this method that it would be fairer in that the “benefit” would be the same regardless of the investor’s tax rate and the method of incentive is one investors would more readily understand and relate to. We will see…

Anyway, all that “good thing/bad thing” debate aside, all we know now is what the HMRC guidance sets out as the parameters for the new scheme should it be implemented.

The plans are, in effect, an expansion of the Help to Buy scheme introduced in 2013 to help first time buyers get on the property ladder.

The new Isa will be available from banks and building societies from autumn for a temporary period of four years. Savers will be able to open accounts with an initial deposit of up to £1,000 and thereafter will be able to save up to £200 a month towards their first home in a tax-efficient environment. While the opportunity to open a new account will only be available temporarily, once an account has been opened there is no limit on how long account holders can save for. I will look at the scheme in more detail next week.

Tony Wickenden is joint managing director of Technical Connection 

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