Your IndustryMar 17 2016

Budget drives youth towards pension savings

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Budget drives youth towards pension savings

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.

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Funds can be withdrawn from the Lifetime Isa with the government bonus from age 60 for use in retirement.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

This extra option has added to the general pensions confusion Lydia Fearn

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.”

The concern about how this would fit with workplace pensions is well founded, according to Lydia Fearn, head of defined contribution and financial well-being for Redington.

She says: “This incentive does not combat the core issue of our looming UK retirement crisis: most young people are saving far less than the 15 per cent level needed for a comfortable retirement.

“The Lifetime Isa initiative may also impact contribution levels within existing defined contribution (DC) schemes, as the under-40s take advantage of this new flexibility.

“Furthermore, it may be an incentive for employers to encourage staff to save more while potentially removing the onus on employer contributions.

“This extra option has added to the general pensions confusion. How will individuals know the best option for them for both short and long-term savings?”

Pension dashboard

Within the Budget, the government also confirmed the creation of a Pensions Dashboard, which will be in place by 2019.

The dashboard should enable individuals to see all their retirement savings, state and private, in one place.

It will be interesting to see if moves in benefit ages for the Lifetime Isa point to a more flexible future for access to the state pension Philip Smith

The Hon Frank Field MP, chairman of the Work and Pensions Committee, says: “The Committee has been pushing for a pensions dashboard, which will help people plan better for retirement. I am delighted the government has committed to a timetable for its creation.”

State Pension

Ahead of the Budget, the state pension age (SPA) was one of the possible areas expected to be used to help tackle the deficit. The SPA was not raised again but this may have been a delay, rather than a decision not to raise it.

Sonel Mehta, head of actuarial resourcing for Equiniti Hazell Carr, says: “Major policy decisions are necessary around how long society expects people to work and the standard of living the taxpayer is prepared to foot the bill for.

“If we are going to expect people to retire at a later age the government may need to go further and consider the changes necessary to make the workplace more accessible to older workers.”

Philip Smith, director at PWC, raises an interesting point about the tax-efficient access age for the new Lifetime Isa being set at 60.

He comments: “If this marks the start of a transition towards reform of pensions taxation and the introduction of the Pension Isa, it could also point to an eventual change in the SPA as access to private pensions has usually been approximately 10 years before the SPA.

“A fixed age for the state pension is inflexible and does not meet the needs of today’s workers. So it will be interesting to see if moves in benefit ages for the Lifetime Isa point to a more flexible future for access to the state pension.”

Pension Isa

Months of speculation over whether Mr Osborne would introduce a pensions Isa in this Budget - something from which the government backtracked earlier in March - caused more concern for investors.

Although this was off the cards in this Budget, research from London-based The Share Centre, published ahead of the Budget, revealed 18 per cent of 1500 savers it polled plan to drip-feed pension cash into an Isa following pensions freedoms.

Some 19 per cent have shunned pensions completely in favour of stocks and shares Isas.

Richard Stone, chief executive of The Share Centre, says: “When it comes to the apparent U-turn on the ‘pensions Isa’, it’s easy to see why it attracted criticism, with many viewing it as yet another complicated change to retirement policy.

“But with auto-enrolment now being made mandatory across the UK, there is less need for personal pensions as a savings vehicle.”

FAMR and the public financial guidance review

The outcomes of the Financial Advice Market Review were announced on Monday 14th, and the Budget document paid tribute to the work done on FAMR to support the provision of affordable and accessible advice for “everyone, at all stages of their lives”.

In the Budget document, the government said it was committed to implementing all the recommendations, including:

■ Consulting on a single, clear definition of financial advice to remove regulatory uncertainty

■ Increasing the existing £150 income tax and national insurance relief for employer-arranged pension advice to £500

■ Consulting on introducting a pensions advice allowance, giving people up to the age of 55 the chance to withdraw £500 tax free from their DC schemes to redeem against the cost of financial advice

■ Restructuring the delivery of public financial guidance to make it more effective - which means, effectively, getting rid of the Money Advice Service, as a consultation document published the same day as the Budget - Public Financial Guidance Proposal - made clear.

Ms Fearn adds: “It is clear the British public needs more access to better financial advice.

“Government has committed to implementing FAMR’s recommendations, including increasing the existing tax and national insurance relief for employer-arranged pension advice from £150 to £500.

“This is great news for those needing more pensions advice. The government will also consult on the pension advice allowance, which may provide flexibility to release tax-free cash within DC pots to pay for financial advice.”

Public sector pensions

Members of public sector pension schemes will be met with a bit of a surprise caused by reducing the discount rate (the superannuation contributions adjusted for past experience - Scape - rate) to 2.8 per cent above CPI.

Tim Lunn, partner Aon Hewitt, comments: “Reducing the discount rate on public sector pensions will increase contributions to public sector schemes.

“This may not just impact on employers but through cost-sharing mechanisms it can also affect benefits or member contributions of public sector workers. This may come as a surprise to members who were expecting no change to their pension.”

Early withdrawal/dependents

There was a slight change to pension tax rules, which Mr Osborne announced would be relaxed so those who are seriously ill can draw a lump sum from their pension scheme even if benefits are already being received.

Furthermore, any such payments made to those aged 75 or older will be taxed as income rather than at the current unfair flat rate of 45 per cent.

David Smith, director of financial planning for Tilney Bestinvest, also highlighted that the Budget removed an “inadvertent anomaly in pensions legislation”.

Current legislation means minor dependents have been prohibited from drawing an income from a drawdown pension when they reach the age of 23.

However, they will now be allowed to continue drawing a pension income post age 23 like other minor beneficiaries, which Mr Smith said was “a welcome amendment to an unintended legislation”.