Does the Lifetime Isa pave the way for a pension Isa?

The reduction in the Money Purchase Annual Allowance, which many expected the government to backtrack on in its Spring Budget but failed to do so, will make pensions less attractive.

But at the same time the auto-enrolment scheme, whereby workers are automatically enrolled into a workplace pension scheme by their employer, has been a positive move for the pensions industry. 

The numbers show millions of people are now regularly saving into a pension plan with employer contributions.

Rumour has it

The government has not tried hard to stifle rumours of a pension Isa, although with so much uncertainty at the moment around the UK’s departure from the EU, is it really the time to shake up pensions and savings?

Jon Greer, pensions expert at Old Mutual Wealth, observes: “There are rumours the Lisa could be being used as a Trojan horse for a future pension-Isa and so far the government has not done anything to dissuade these rumours.”

Neil Lovatt, commercial director at Scottish Friendly, goes so far as to say the pensions brand “is bust”. 

He is largely supportive of the Lifetime Isa, believing it could be a “breakthrough” product among young people.

With earlier access to pension funds, and the ability to pass these onto the next generation, we don’t see the popularity of saving through a pension waning.Trevor Clark

However, he urges the government to allow employer contributions and begin expanding the age at which people can apply for a Lisa, then pensions will “wither away on the vine”.

Mr Lovatt thinks the Isa will evolve to take over from pensions eventually, which have historically struggled to gain interest from younger generations, although automatic enrolment has made gains here.

But there are plenty who firmly believe the Lifetime Isa is not the forerunner to a pensions Isa at all.

Among those is Ollie Smyth, independent financial adviser at Walker Crips Wealth Management, who says while the Lisa could be viewed as a supplement to pensions, it is “certainly not a replacement”. 

“Higher- and additional-rate tax-payers are still able to claim further relief via pension contributions over the 25 per cent top-up available within a Lisa, as well as being able to access their pension fund from the age of 55 rather than 60”, he says.

Mr Smyth confirms the recently-launched Lisa also remains subject to normal Isa rules and would be included in any estate calculations for Inheritance Tax, unlike pensions. 

“Though pension death benefits do fall under the remit of income tax should death occur after 75 years of age, effective intergenerational planning can effectively mitigate this to a large extent,” he explains.

“Funds from Lisas must also be drawn from one of two scenarios to avoid penalties which undermine the effectiveness of the vehicle.”

Other options

Trevor Clark, operations director at Rutherford Wilkinson, also does not think the government is laying the groundwork for a pensions Isa.

He asserts: “The idea of a pensions Isa doesn’t really make sense when retirement is one of the accepted options for the withdrawal of Lisa funds. 

“With earlier access to pension funds, and the ability to pass these onto the next generation, we don’t see the popularity of saving through a pension waning.”

But he does point to the possibility of another type of Isa, as highlighted by chancellor Philip Hammond in the Spring Budget, who not only committed more funding to social care but confirmed there would be a Green Paper.  

Mr Clark says: “In terms of retirement planning, some of the options considered by the government in its consultation on social care are the early care Isa, where people can save tax-free for their healthcare and allowing withdrawals from pension pots tax-free to pay for healthcare.”

One thing the government is likely to be keeping a close eye on is the popularity of the Lifetime Isa now it has launched.

Demand could be restricted by the fact there are only a few providers offering the product at launch on 6 April, and although a few more plan to launch a Lisa later this year, there are many more who have said they will wait and see what happens.

Putting an end to constant speculation on products and tax reliefs will help people understand the benefits of using pensions and Isas to save.Rachel Vahey

Martin Jarvis, associate consultant at Mattioli Woods, acknowledges there is the potential for a Pension Isa in place of the current pensions system.

He notes: “Given the relative complexity of pensions compared to Isas, and depending on the uptake of the Lifetime Isa, it could well mean the government takes an even closer look at the overall pensions landscape to homogenise this in line with Isas.”

The savings landscape

There is so much uncertainty around the future of pensions, and the role Isas might play in retirement saving, many are urging the government to provide some clarity.

“Either it is the government’s intention to go down the pension Isa route in several years’ time or it isn’t. Either way, they should inform providers, advisers and the public so we can all make plans for the future,” says Martin Tilley, director of technical services at Dentons Pension Management. 

“Although we are told there will be no major changes to the current pension tax regime for the time being, it depends what you deem as ‘major’.

"Could we see a reduction in the pension annual allowance to say £30,000 and at the same time see the retirement element of the Lisa allowance increase from £4,000 to £8,000? 

“This could be followed by an annual allowance reduction to £20,000 and the retirement element of the Lisa increase to £12,000 and so on, until tax relieved pension contributions are phased out and the retirement element of the Lifetime Isa is £20,000.”

While the industry continues to speculate, Rachel Vahey, at Nucleus Financial, suggests the Lifetime Isa needs to find its position within the savings landscape.

She admits: “Its introduction does indicate fuzzy thinking by the government on the UK’s long-term savings strategy. Nucleus would like to see a cross-political group work together to develop a long-term vision for UK pension provision. 

“Putting an end to constant speculation on products and tax reliefs will help people understand the benefits of using pensions and Isas to save. This is crucial at a time when automatic enrolment is coming of age, and minimum contribution limits are increasing to their full level.”

She concludes: “The constant tinkering with both pension and Isa legislation – and the rumours of change – only puts people off saving for their later life.”

eleanor.duncan@ft.com