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Budget drives youth towards pension savings

This article is part of
Guide to the Budget 2016

Budget drives youth towards pension savings

The furriest rabbit out of George Osborne’s Budget hat was the promotion of the Lifetime Isa, which could help young people save flexibly towards a pension.

According to Mr Osborne, the July 2015 government consultation ‘Strengthening the incentive to save’ revealed while people liked the 25 per cent tax-free lump sum element of a pension, they did not understand it and found it inflexible.

This is why he unveiled the Lifetime Isa (being called Lisa already in some quarters), in his Budget on 16 March.

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From 6 April 2017, any adult under 40 can open a Lifetime Isa and pay in a maximum of £4,000 a year.

This will be in addition to a cash or stocks and shares Isa, subject to overall annual Isa investment caps of £20,000. Transfers will be allowed from one Isa into another.

For every £4 an investor saves, the government will boost this with £1; so for a full year’s worth of investment, the government will bolster people’s savings with a 25 per cent bonus.

Funds can be withdrawn from the Lifetime Isa with the government bonus from age 60 for use in retirement.

However, some in the industry believe this is just the start of more changes to come to pensions, especially the “suspicious” 25 per cent contribution which mirrors the 25 per cent tax-free lump sum on pensions.

Phil Brown, head of retirement propositions and change for LV=, says: “It would be good to know more detail about the availability or not of existing pension contribution relief.

“Over time, one imagines there will be more convergence between Isas and pensions in coming years and that may start as early as the Autumn Statement 2016.”

There are also questions over the restrictions when it comes to drawing down the Lifetime Isa.

Gary Heynes, RSM’s head of private client, calls the Lifetime Isa a “smart move as it gives young people a flexible pension pot”, but warns: “there are restrictions when it comes to drawing down on the Isa which may mean that pensions still remain attractive.

“This is just another route to retirement savings and the right option will need to be considered carefully on an individual basis.”

Moreover, the Lifetime Isa will do little to help the so-called ‘squeezed middle’ of 40-55 year olds who are struggling to meet current expenditure and save enough for retirement.

Karen Bolan, head of engagement at AHC, comments: “Mr Osborne may be trying to ‘help the next generation to save’, but in our experience, we see many people in late middle age who are heading for a very lean retirement and who will be just outside the scope of this new provision.

“These are people for whom there won’t be enough time to fully benefit from auto-enrolment and now they are also missing out on the Lifetime Isa. We definitely need more detail about how it will work in order to assess whether it will function effectively as a retirement savings vehicle.”