OpinionDec 8 2016

How do you solve a problem like the LTA?

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How do you solve a problem like the Lifetime Allowance?

Industry research consistently finds that customers don’t understand pensions and find it all a bit complicated.

And while education and engagement needs to play a role, we also need to make things much simpler.  

Isas are generally recognised as being quite simple as there’s a single and simple set of rules that apply to everyone.

The Lifetime Isa, on the other hand, is more complex because it’s not been designed to benefit everyone and the recent FCA consultation paper highlights the quite complex considerations in matching this product with only those customers for whom it’s intended.

Pensions face a similar challenge to Lisa because there are certain groups of people for whom putting money in to a pension is not optimum. The lifetime allowance causes this problem.

Removing the Lifetime Allowance in isolation could see more tax relief benefiting the most affluent than is currently the case and this would be unpopular with the electorate.

It’s a very small percentage of pension savers, but the negative impact on outcomes at retirement is being felt by everyone.

Whether we stick with the term 'pensions' or rebrand this in the future, we need employers, providers, advisers, and the government to get behind a simple and impactful message which applies to everyone.

The moment we introduce small populations of people for whom the message doesn’t apply, the game is up from an impact perspective due to the complex caveats which need to be introduced.

The current tax system allows wealthy investors to save up to £40,000 a year into a pension. The term ‘tax relief’ is used, but that is a bit misleading as this is really about tax deferment and those with the most money to save tend to be the oldest workers for whom the period of tax deferment can be quite short.

There are, of course, some tangible benefits for those who drop a tax band in retirement, and only 75 per cent of pension savings are subject to taxation in retirement.

Where the system shoots itself in the foot is in investment growth. Industry research currently shows that returns of more than 8 per cent compound are being achieved by many default funds over one, three and five year horizons.

Let’s therefore consider two examples: