Steve Bee argues that we were introduced to our future new pension system in the 2016 budget after all.
After all the speculation I think our new pension system was announced in the 2016 budget after all. But I don’t think many people will realise it for a few years yet.
Looking back it will be obvious, but at the moment most in the pension industry will be breathing a huge sigh of relief that the widely expected changes to pensions tax-relief did not come about. We have retained our EET pensions (exempt input, exempt growth, taxed output) and we’re safe from the dreaded TEE, Isa-type system (taxed input, exempt growth, exempt output). We’ve even retained our EEE tax-free cash - it was specifically mentioned in the budget speech!
Phew! Lucky us?
I don’t think so.
From April 2017 the new Lifetime Isa will be made available to people under the age of 40. It is built on the lines of the US 401(k) in that it can be used for both pension and home purchase purposes, but with a little tweaking I’m sure it could be made more 401(k)-like, particularly if it offered other lifetime trigger options for access to funds, or perhaps could be used as collateral for loans which would make more sense. A system that would offer those currently under the age of 40 a far more flexible long-term savings option than our current pension system, particularly if it was made possible for employers to contribute at least the auto-enrolment minimum towards it.
On the face of it the introduction of the Lisa provides younger people with an alternative pension system. One that might suit their lifetime needs much better than our existing pension system. “But it’s hard enough to get our heads around one pension system, let alone two!” is probably what you and everyone else is thinking. Quite! We don’t need two pension systems, that’s entirely unnecessary.
My guess is that the government people have given up on any idea of reforming or simplifying the old pension system. Every attempt to reform it thus far has simply made things worse, just as every attempt to simplify it has made things infinitely more complex. There also seems to be a clear desire to move from an EET system to a TEE system. The Pension Isa, modelled on the US 401(k) is the ideal solution and its introduction was announced in the budget this afternoon.
That is not an insignificant development in the UK pension story.
There would have been problems with simply switching to a TEE system right away, both political and practical; changing the underlying tax basis of pension schemes halfway through the roll-out of auto-enrolment to 1.5 million employers probably wouldn’t have been too sensible a thing to do. But auto-enrolment, along with other pressing political issues will be done and dusted in a few years. Time then to think whether we will need two alternative pension systems, one based on EET and one based on TEE.
It will make much more sense in those soon-to-be future days to get rid of one of the systems altogether and just have one. Won’t it?