The first leg of the bi-annual tinkering with Britain’s savings’ environment, historically referred to as the Budget, has recently had its instalment for 2016. The Chancellor of the Exchequer has maintained his record of increasing the complexity of the savings landscape with these latest announcements. Last summer’s ‘Strengthening the incentive to save’ consultation had stated that simplicity should be a principle of any reform but old habits have prevailed over meaningful progress, in more than just this case. Thankfully, the complication that changing the tax treatment of pensions would have created has been avoided, for the time being.
Savers under 40 now have the Lifetime ISA (“LISA”) to add to their choices when deciding if and how to save. The LISA behaves much like a conventional ISA but provides a 25% bonus on contributions if the proceeds are used to buy a first home (for up to £450,000) or to provide retirement benefits after age 60. The 25% bonus and growth thereon will be lost if the proceeds of the LISA are used for any other purpose (at this point, although Government will consider adding other permitted life events to retain the bonus). The 25% bonus is equivalent to Basic Rate tax-relief under the existing pension regime. Those savers whose marginal rate is higher than the Basic Rate will forfeit immediate financial benefits if saving into a LISA instead of a pension.
The LISA is more flexible than conventional pension savings as proceeds can be withdrawn free of income tax at any time. However, this flexibility comes at a cost as not only will the 25% bonus be lost but a further 5% charge will be levied on withdrawals before age 60 (unless the withdrawal is to purchase the first home). Is this charge another tax? Pension savings can (currently) be withdrawn from age 55, albeit subject to income tax at the point of withdrawal. Government is also considering allowing borrowing against LISA savings. The Centre for Retirement Research has found that allowing access to savings before retirement and/or borrowing against these savings in America, where such facilities have existed for some time, undermines saving for retirement. Does the UK really need to conduct follow-up empirical research to test the outcomes witnessed in America?
The provisions of Automatic Enrolment (“AE”) have not been changed by theBudget. Consequently, the take-up of LISAs will be impacted by those in employment having a workplace pension as the first call on their saving towards retirement. LISA contributions are only permitted up to age 50 and are subject to a maximum of £4,000 per annum. These limits cap the economies of scale that savers might achieve, particularly relative to any fixed costs that providers might levy. Savings into a LISA will also not enjoy the protection of the 0.75% per annum charges cap that the same contributions will receive if directed into a workplace pension default.
The ‘Strengthening the incentive to save’ consultation called for any reform to build on the early success of AE. The LISA appears to head in the opposite direction, creating a saving channel away from and competing with AE. Might LISA be a live test for the attractiveness of a Taxed-Exempt-Exempt (“TEE”) retirement savings system (boosted by the first-time home-buyer’s sweetener)? I suspect that this LISA might experience commercial success on the same scale asApple’s Lisa.
The Budget did contain a number of constructive measures, following on from the recommendations of the Financial Advice Market Review (“FAMR”):
- The most significant step is the announcement that the Government will ensure that the pensions industry designs, funds and launches a pensions dashboard by 2019. How the Government intends to secure the delivery of the dashboard is not yet clear. Savers and their advisers will benefit from having this consolidated view of the savers’ pension assets;
- The provision of advice will enjoy greater support too, with employers being able to contribute £500 tax free towards such advice (up from £150 today);
- A consultation will be launched on allowing savers to withdraw up to £500 of their defined contribution savings before retirement to pay for financial advice; and
- The definition of what constitutes financial advice is to be clarified.
The provision of free public financial guidance is to be restructured, resulting in a single pensions guidance body – although not before 2018. This body will replace the Money Advice Service while merging the functions of The Pensions Advisory Service and Pension Wise. The Government is now consulting on the delivery model for this single pensions guidance body.
The undisputed winner from the 2016 Budget is the conventional ISA, which sees its allowance each year increase from £15,240 to £20,000 in April 2017. The implementation of the recommendations around the pensions dashboard and financial advice arising from the FAMR are generally positive too. However, the LISA strikes me as a distraction, at best, in the context of retirement saving. It further clutters, rather than simplifies, the range of options facing savers. It potentially undermines AE as well. Not only does the LISA embed a stealth withdrawal tax but it also looks like a Trojan Horse at the vanguard of a TEE regime. It is, however, a handy top-up for the eligible few who have exhausted their other tax-advantaged retirement savings opportunities to further benefit from the Chancellor’s efforts. Some incentives might well have been strengthened but does that include the incentive to save?