When the Chancellor published his Green Paper on ‘strengthening the incentive to save’ last summer, it seemed like we might be on the brink of a major reform to the tax treatment of pensions.
We geared up for the March Budget with speculation reaching fever pitch as to whether the ‘pensions Isa’ or the ‘flat-rate relief’ proposal was in the lead as the favoured option. Eventually, about 10 days before the Budget, the Treasury decided they had had enough of the speculation and, no doubt with one eye on the forthcoming EU referendum, made it clear that there would be no big changes to pensions in the March Budget because ‘the time was not right’.
But anyone thinking that we were in for a quiet Budget on the pension front would have had a bit of a shock when the Chancellor stood up. A profound announcement with big implications for retirement saving was to follow, and this one didn’t have the word ‘pension’ in its title at all.
On the face of it, the ‘Lifetime ISA’ is simply a new product which falls somewhere between a traditional short-term Isa with instant access and limited tax breaks, and a full-blown pension with generous tax breaks but tight restrictions on when the money can be withdrawn.
Under the Lifetime Isa you can get a government top-up of 25 pence in the pound on your net contributions (equivalent to basic-rate tax relief on your gross contributions). You have to open the account before you are 40, and can go on getting top-ups until the age of 50. You cannot access the account without penalty before the age of 60, except to put it towards the deposit on a house or in some limited exceptional circumstances such as being terminally ill.
One big issue is how younger workers are to decide whether or not this product is right for them.
The big fear is that young people, having relatively little disposable income for saving, may reject the workplace pension into which they have recently been automatically enrolled in favour of the seemingly more attractive Lifetime Isa. The consequence of this is likely to be that they will lose the valuable employer pension contribution that they would otherwise have received.
But it is not just the workplace pension which is an option for the younger worker. The existing Help to Buy:Isa will continue to run for several years. Under this scheme you can save up to £200 per month over a five-year period and receive a government top-up of 25 per cent - the same as with the Lifetime Isa. Unlike with the ‘Lifetime Isa’ there is no ‘exit penalty’ for withdrawing your money early, although you do lose the government top-up.
In addition, the government has just launched a ‘help to save’ scheme specifically for lower-paid workers receiving working tax credits or the new universal credit. Under this scheme, savers can put in up to £50 per month and receive a 50 per cent top-up if they continue to do so for two years. If they continue to save for another two years, they can get a further 50 per cent top-up, giving a maximum potential top-up of £1,200. It seems likely that this would be the best deal of the various short-term saving schemes on offer, though awareness of such schemes tends to be low and take-up is often very poor.
