Is the new Lifetime ISA announced in the Budget the shape of things to come for retirement planning?
Chancellor George Osborne has now delivered his much-anticipated Budget speech, only the second by an all-Conservative government in two decades. Despite a less positive backdrop to the economy than in his previous Budgets, he has nevertheless managed to produce several surprises, including net tax cuts in 2017/18 and 2018/19 before reaching his often-repeated goal of a budget surplus in 2019/20.
There has been speculation throughout much of the last 12 months that the Chancellor would unveil a radical new system for pensions. The so-called ‘Pension ISA’, which would see pension contributions made from taxed income and withdrawals tax-free, had according to some sources been a frontrunner among a range of other ambitious proposals.
But less than a fortnight before the Budget, the Treasury was in full-retreat mode. An ‘ally’ of Mr Osborne had reportedly said he had “concluded that now isn’t the right time, with uncertainty in the global economy and reforms such as auto-enrolment still bedding in, to turn things on their head.”
So it seemed the spectre of more major pension upheaval, in this Budget at least, had disappeared before the Chancellor rose to his feet. However, despite the apparent retreat on the Pension ISA idea, he did announce something patently similar in the form of a new Lifetime ISA for the under-40s, starting in April 2017.
Spot the difference
Under the new scheme, an eligible individual will be able to contribute up to £4,000 a year into a Lifetime ISA and receive a 25% government bonus on their savings; anyone who saves the maximum in a year will receive a £1,000 top up. The savings can be accessed from the age of 60 to help fund retirement, with all withdrawals tax-free. There’s also flexibility to use the money before the age of 60 to help purchase a first home. If the investment is withdrawn for any other purpose however, the 25% government bonus would be lost and a 5% charge would be levied on the amount withdrawn.
Critics of the new Lifetime ISA point out that investors will need to trust that future governments continue to honour the promise of paying a 25% bonus at the end of the term of the investment; some also suggest that it risks undermining auto-enrolment - the government-backed workplace pension scheme. The argument is that some under-40s may opt out of pension saving in preference of the newer, simpler Lifetime ISA.
“I would urge employees not to see the Lifetime ISA as a replacement for pension saving,” says Ian Price, divisional director at St. James’s Place.
“Anyone who has a workplace pension is already benefitting from a government ‘bonus’ in the form of tax relief at their highest marginal rate [20%, 40% or 45%], a contribution from their employer, and a tax-free lump sum available after they reach 55,” he continues.
But Price is pleased that the Chancellor has made attempts to improve the prospects for the self-employed and first-time buyers.
“The self-employed don’t benefit from an employer contribution, so the Lifetime ISA will go some way to incentivising retirement saving for them. The Lifetime ISA will also make sense for first-time buyers who are saving for a deposit,” he observes.
But this Budget provided some big clues that the ISA model could be the future for incentivising people to save for a variety of life stages. “The big selling point of an ISA is that it’s simple,” says Price. As such, he suggests the Lifetime ISA could be the sign of things to come.
“There has been no formal response to the consultation on pension tax relief yet, so we could still see pensions change dramatically. By introducing the Lifetime ISA, the Chancellor could be laying the groundwork for the Pension ISA, so I wouldn’t be surprised if we see it introduced eventually at some point in the future.”
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.