Has the Lifetime ISA been given too big a job to do?
Can the Lifetime ISA deliver in a market where consumers often do not see the wood for the trees? AJ Bell’s Mike Morrison takes a view
It seems that at every Budget announcement or Autumn statement there is the prospect of radical pension reform, with the requisite close down sale for pension contributions as people look to take advantage of pension tax relief while they still can.
This year the hype was bigger than ever and the Government had to move late on the Friday evening before the Budget to quash the expectation that we were about to see the biggest pension reforms for years. This was scotched, most likely for political reasons, but with the widely acknowledged understanding that we had not heard the end of it!
There were lots of rumours including a reduction in the Annual Allowance (AA) as an anti-forestalling measure, a little bit more off the Lifetime Allowance (LTA), Employer NICs and salary sacrifice.
With the Chancellor’s penchant for pulling rabbits out of hats, we got something a bit different with pretty much none of the above touched upon.
Mr Osboure said there was no positive consensus from the industry on methods of reforming tax relief but we sort of got one of them in a backdoor fashion anyway. The consultation into reforming pension tax relief did not align everyone behind a Pension ISA but in a not so subtle twist, we got an ISA Pension.
The ISA stands in its own spotlight – it might not have the same financial benefits of a pension but is simple to understand and administer.
“Why can’t pensions be more like ISAs?” is a common theme. I think that day is coming but from the opposite direction – we have cash ISAs, Stocks and Shares ISAs, JISAs, innovative finance ISAs, help to buy ISAs and now, as announced in the budget, a Lifetime ISA.
In principle it is a nice product and anything that encourages people to save more for retirement is welcome. However, there are a number of issues that concern me:
• We could well get to the situation where we are forcing people to choose between auto enrolment / joining a work place pension and funding a Lifetime ISA. .
• Whilst there is the promise of a matching employer contribution via a pension in addition to tax relief (or Government bonus) under the ISA there will be that emotive and persuasive “house purchase” thrown in too.
• This is also potentially a trade-off between a one off transaction where the end result could be sold at any time and the option to fund potentially thirty years of retirement.
In a society that prioritises consumption over saving, and that prioritises spending on property over everything else, I think there could be a market that does not see the wood for the trees.
And let’s not forget, retirement can now last for 30 years. Whilst it is undoubtedly desirable to get a foot on the property ladder, a house purchase is a one-off transaction.
Let’s also look at this through the wide lens. Will ISAs become the new pensions and, if so, will it be a big bang or by the operation of a number of parallel regimes?
No doubt there were will be revision to the detail before it comes into existence. The circumstances that will allow money to be withdrawn being a key area, the penalty for offending the rules can be loss of the Government ‘bonus’ and as it stands an unfair and seemingly unnecessary penalty of 5% of the value.
In other news the threat to salary sacrifice and Employer NICs are still on the page and the reprieve could be short lived.
So let’s get on with what we have got – it’s not long to the Autumn Statement!
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