New Lifetime ISA announced
In his Budget speech the Chancellor announced the introduction of a new Lifetime ISA (LISA) from 6 April 2017, available to any adult under 40, and designed to facilitate saving both for a first home and for retirement.
In the run up to this Budget speculation reached fever pitch about Mr Osborne’s plan for radical changes to pensions tax relief following the government consultation on this. It was widely believed that he would either move to one flat rate of tax relief, or make a wholesale change in which pensions would be taxed like ISAs. Concerns about loss of the tax free lump sum and prohibition of salary sacrifice for pension contributions were also rife.
Is a new pensions tax regime being introduced by stealth?
In the event the Chancellor has left the existing pensions tax regime intact, but introduced a new LISA for younger savers to sit alongside it. He is thereby introducing a savings product that is broadly taxed on a ‘Taxed, Exempt, Exempt’ basis, with contributions being made from taxed income, funds in the ISA accruing returns tax free, and money withdrawn being tax free. While the option to save into a traditional pension which is broadly taxed on an ‘Exempt, Exempt, Taxed’ basis remains, the flexibility of the LISA may well tempt younger savers to put the limited spare funds they have for saving into the LISA instead. This begs the question whether this is a move to a new pensions tax regime by stealth.
Lifetime ISA: how will it work?
- The LISA will be available to those aged 18 to 40 from 6 April 2017.
- It will be possible to save up to £4,000 per tax year into the LISA, and receive a 25% bonus (i.e. up to £1,000) from the government, paid at the end of each tax year.
- Contributions paid between age 18 and 50 will attract the government bonus.
- Funds can be used to buy a first home valued at up to £450,000 with the government bonus at any time from 12 months after opening the account, and can be withdrawn for any purpose (and again with the government bonus) from age 60.
- It will also be possible to access the fund, including the bonus element, in the event of terminal illness.
- If savers make withdrawals at any other times, the bonus element of the fund (plus any interest or growth on that element) will be returned to the government, and a 5% charge applied.
- Further details will follow. The technical note on the new LISA states that the proposals form the basis for discussions with the industry to finalise the parameters of the scheme and that final details will be set out later this year.
Interaction of the Lifetime ISA with existing pension regime
There appears to be the potential for conflict and confusion for employees in relation to their options to save into a LISA and/or into
their employer’s pension scheme.
The LISA will be a savings vehicle for retirement with added flexibility (and portability) which traditional pension schemes do not offer, and which many employees may find attractive. However, the LISA will not benefit from an employer contribution. Employees who can afford to contribute both to a LISA and to their employer’s pension scheme may benefit from both, but those who can only afford one may decide to opt-out of their employer’s pension scheme. It would be ironic if the Chancellor could be said to be incentivising employees to opt-out of automatic enrolment.
Further Budget announcements
- Salary sacrifice: it was feared that salary sacrifice for pension contributions would be targeted by the Chancellor. The Budget document does state that the Government is considering limiting the range of benefits that attract income tax and NICs advantages when they are provided as part of salary sacrifice schemes. However, the government’s intention is that pension saving, childcare and health-related benefits such as Cycle to Work should continue to benefit from income tax and NICs relief when provided through salary sacrifice arrangements.
- ISA allowance: this will rise from £15,240 to £20,000 from April 2017. Any contributions to a LISA will sit within the overall £20,000 ISA contribution limit.
- Pensions dashboard: to help people to keep track of their pensions, the government will ensure the industry designs, launches and funds a pensions dashboard allowing individuals to view all their retirement savings in one place by 2019.
- Financial advice: the government will consult on a single clear definition of financial advice, on increasing tax relief on employer-arranged pension advice from April 2017 and on a Pensions Advice Allowance, allowing people before 55 to withdraw up to £500 tax free from a DC pension to pay for financial advice. The statutory financial guidance providers (the Money Advice Service, TPAS and Pension Wise) will be restructured to ensure that consumers can access the help they need, leading to a new pension guidance body and a slimmed-down money guidance body.
- Public sector pensions: the public service pension scheme discount rate has been reviewed and reduced and employer contributions will rise as a result from 2019-20 onwards. The government will work with local government administering authorities to establish a new Local Government Pension Scheme infrastructure investment platform, in line with their Wealth Funds proposals, to boost infrastructure investment.
- Technical amendments: the Budget documents contain a number of technical amendments to the pensions tax relief regime that support the freedom and choice reforms.