The Lifetime Isa could be more attractive to savers than the current pensions system, leading to current retirement options being made redundant, industry figures have warned.
In yesterday’s (16 March) Budget, chancellor George Osborne unveiled a new ‘Lifetime Isa’ for those under 40, which offers a 25 per cent government bonus to savers using their pot to buy their own home or save for retirement.
Savers who invest in the new Isa - which will be introduced in April 2017 - must wait until they are 60 to use it for retirement, or can withdraw the funds at any time to buy a home up to a purchase value of £450,000.
But except under certain circumstances related to ill health, savers who exit early face a 5 per cent charge and lose the bonus and interest accrued.
Ian Dyall, head of estate planning at Towry Financial Planners, said it could be more attractive to certain savers than the existing pensions system, because up to £4,000 a year can be saved tax-free, with the government donating £1 for every £4 saved up to the age of 50.
“This is extremely good news for savers as the scheme will offer the equivalent of basic rate tax relief upfront, tax relief for the duration of the Isa, and will be tax-free at retirement.”
Alistair Cunningham, financial planning director of Surrey-based Wingate Financial Planning, argued the new scheme trials a savers’ bonus as a prelude to abolishing tax relief.
“It’s blindingly obvious this is a way to reduce the total tax relief granted to pension savers.” Alistair Cunningham“It seems to be blindingly obvious that a way to sweep away these two ‘issues’ and reduce the total tax relief granted to pension savers, therefore reducing the drain on the Treasury’s coffers, is to sweep away the existing regime and replace it with a new one,” he commented.
Aon Hewitt partner Lynda Whitney reckoned the chancellor’s announcements looked like “unfinished business” and many of the key issues raised in the pensions tax consultation have been deferred rather than decided.
She said the Lifetime Isa could be “the Trojan Horse that kills off pensions at a later stage”.
However, Old Mutual Wealth’s retirement planning manager Adrian Walker disputed this, stating pensions are still the best retirement savings vehicle.
“The £1 bonus for every £4 is parity with the basic rate relief you currently receive on a pension, but crucially without employer contributions. Younger savers will also have to place faith in future governments not to renege on the promise of a bonus at age 60.”
He called the new Isa a “gimmick” that will only appeal to younger savers looking for help getting on the housing ladder.
Huw Evans, director general of the Association of British Insurers, said for most people’s retirement outcomes, employer contributions paid into a workplace pension will be critical.
“The test for success for the Lifetime Isa will be whether it increases overall retirement savings and does not undermine the auto-enrolment programme; this must not be a backdoor to the pensions Isa.
“For the new system to work it will be vital that people understand their options fully and can access financial information to ensure the best outcome for their individual circumstances.”
David Robbins, senior consultant at Willis Towers Watson, added that if the end game for the new Isa to replace pensions, there will need to be a way for them to accept employer contributions with tax siphoned off and a top-up applied.
The comparison between the 25 per cent government bonus and pensions tax relief depends on the tax the individual pays both in work and in retirement, he pointed out, as well as on whether the pension contribution comes from the saver, or is offered by the employer as an alternative to salary.
katherine.denham@ft.com
