The Chancellor appears to be a big fan of the first law of stage magic – get the audience looking the wrong way. After all the sound and fury about switching the basis of pensions taxation, abolishing the 25% tax-free lump sum, setting a fixed rate for tax relief and abolishing the tax benefits of salary sacrifice, the key pension changes in Budget 2016 are:
- The pre-announced switch to a £1,000,000 lifetime allowance with associated protections for savers over this level as at 5 April 2016.
- The pre-announced tapering of the annual allowance for those with income and pension savings over £150,000 a year at a £2 for £1 of allowance rate (to a minimum annual allowance of £10,000 for those earning £210,000 or more).
- Increased employer contributions for the unfunded public sector pension schemes due to a change in the discount rate associated with these schemes in the next quinquennial review.
- A pensions dashboard to be developed with the pensions industry by 2019 to allow savers to see all their pension savings in one place.
- Increasing the employer tax relief for providing their staff with pensions advice to £500 from £150, and similarly allowing members to take up to £500 of their pensions pot before age 55 for pensions advice.
- Tweaks to national insurance for the self employed.
The Lifetime ISA – pension of the future?
However, the Chancellor's hard work on reforming pension contribution taxation has not been entirely wasted. He has announced a shiny new Trojan horse that will compete for younger savers' savings pots and which has several bells and whistles that boring old registered pension schemes do not have.
Introducing LISA (from April 2017).
LISA is what pensions could have looked like had the Chancellor's reform not been stymied by the complications created by trying to graft a tax, exempt, exempt pensions system onto an existing and complicated exempt, exempt, taxed system.
LISA's key features are:
- It is a retirement product based on an age-limited ISA with payments into a LISA coming from taxed income, with a Government bonus of 25% topping up the amount paid in. A maximum of £4,000 can be paid in annually (plus the Government bonus cash - £1,000 on £4,000 saved).
- Only those over the age of 18 and under 40 will be able to start a LISA though once started they will be able to pay into their LISA up to the age of 50.
- The target age for taking LISA savings is 60. LISA savings will be available at that age tax free.
- Savers will be able to take money out of their LISA before the age of 60. If this is done to fund a first home then there will be no negative consequences. Withdrawals for any other reason will result in the saver losing their Government bonus cash, and incurring a 5% charge.
When we say that LISA is what pensions could have looked like if the Government had switched to a TEE system, that statement is not without some caveats. The key question looking forward is how many of these caveats will apply in five years time as the flexibility and easy to understand "bonus" that applies to LISA potentially outcompetes normal UK pension savings:
- LISAs cannot be used for auto-enrolment. Therefore, unless employees opt out, some of their savings will be diverted into the old pension products.
- LISAs are age limited. If you are over 40, or will be in April 2017, you cannot save into a LISA.
- LISAs have no special tax privilege for employer contributions as would be expected for a product whose main aim is to move forward tax revenues. They therefore look (currently) a lot like a normal ISA in this respect.
- As noted current LISAs are TEE products, but how long will that last "E" remain? Governments have not had a good record of leaving untaxed pots of cash untaxed in tough times.
We assume that the required legislation is currently being prepared so that the product is available for launch in April next year.
This should provide more flesh over the bare bones announced in the Budget. We will comment further once it has been released for consultation.
After all, it could be the future of UK pensions savings!