The chancellor of the exchequer has unveiled a new pension saving products, the lifetime ISA, but what does it mean for trustees?
Trustees could be forgiven for being a little confused and uncertain about the future of pensions. In under nine months the industry has been facing up to potential changes including Pensions ISAs, flat-rate tax relief or no tax relief whatsoever with a government top up.
Now we have an answer. As of April 2017 a new pensions savings vehicle will come into being – the Lifetime ISA.
What is it?
The Lifetime ISA is a new twist on the old ISA product designed to help people save to buy a home and build up a pension.
From April 2017 anyone under the age of 40 will be able to open a Lifetime ISA and save up to £4,000 each year. The government will incentivise this in the form of a 25% top up. So if someone uses the full £4,000 allowance, they will get a further £1,000 from the government.
Savers will continue to get the government bonus on any savings made annually up until the age of 50. But they can continue to save after that – just without the added incentive.
The savings can be used towards a deposit on a first home worth up to £450,000. But any money left in until the age of 60 can be taken tax free, making it an attractive vehicle for pension saving.
What does it mean for trustees?
The move has been welcomed as a way of incentivising young people to save.
However, many industry experts have cautioned that the measure could harm auto-enrolment. Steven Cameron, pensions director at Aegon, said: “There is a huge risk that the LISA will encourage some under 40s to turn down the opportunity to be auto-enrolled into a workplace pension, even though that comes not only with the equivalent 25% Government bonus on personal contributions, but also with an extremely valuable employer contribution.”
Andy Bell, chief executive at investment platform AJ Bell, concluded: “The Lifestyle ISA will go head to head with auto enrolment and I predict the new kid on the block will win hands down.”
For DC trustees communications will be key, particularly when it comes to educating savers on the benefits of staying auto-enrolled in a company pension scheme.
It is possible that this is the first step along the path to replacing pensions with an ISA system. We know it is something that George Osborne was considering the wider consultation on tax relief.
David Robbins, a senior consultant at Willis Towers Watson said: “It was widely believed that the Chancellor favoured turning pensions into ‘help to retire’ ISAs… George Osborne’s Budget speech said only that there was ‘no consensus’ for this, and not that he had been persuaded it was a bad idea. The Lifetime ISA looks like a foot in the door for more radical change.
Patrick Bloomfield, partner at Hymans Robertson agreed: “It could also be a forerunner to the end of pensions as we know it. It’s essentially a new pension regime through the backdoor and the first step on the path to a pensions ISA for all.”
So it would be premature to rule out a shift towards ISAs more generally. Indeed, there is an argument that Osborne has only held off on Pensions ISAs for the turbulent run up to the EU referendum. If that’s the case – we could see more on this as soon as the Autumn Statement.
Unfortunately for trustees, this means that the confusion and uncertainty will remain for now.