The new lifetime Isa may be one step on the road towards a pension Isa.
Pensions escape unscathed and the new lifetime Isa may fill a savings gap we weren’t sure existed!
The lifetime Isa looks to be a reaction to the need to encourage the young to save for their future and we welcome this pragmatic solution. It makes savings easier to access for many, and will hopefully help encourage the savings habit. It expands on the popularity of the existing help to buy Isa regime.
It may be seen as the first step on the road to a pension Isa for everyone, and here’s the downside, as pensions still offer greater potential for total savings - with employer contributions, higher limits and the difference between TEE (taxed, exempt, exempt) and EET, (exempt, exempt taxed) although for those on lower incomes the effect of this will be less marked.
There will be difficulties too with the detailed rules for partial access which impose a 5% charge on top of the loss of the government bonus. The need to calculate this will immediately take away some of the traditional simplicity of an Isa and the charge may be enough in itself to deter many from taking up this new product.
However, if take up of the new product is enthusiastic, then it increases the likelihood that we will see a full move to pension Isa for private pension provision at some point in the future. However, that increased likelihood doesn’t change the risk that a pension Isa produces lower incomes in retirement for many.
In the Budget we also saw a raft of helpful technical changes to address some of the oddities introduced by the pension freedoms, including the ability to roll child defendant’s drawdowns into nominee drawdowns at age 23; harmonisation of the serious ill health tax rules with the rules prevailing on death; and reintroducing trivial commutation for defined contribution drawdown pots under £30,000.
It has also been announced the government will clarify in legislation that no inheritance tax arises when a pension member designates funds into drawdown but doesn't draw all their benefits before death.
Changes to the capital gains tax regime will be welcomed by many, as will the increase in the annual Isa subscription limit. Welcome too is the news that salary sacrifice is being retained, for pensions as well as health and childcare schemes.