In his eighth Budget as UK Chancellor, George Osborne resisted his radical impulses, apparently in the face of backbench opposition, to overturn pensions tax relief and left pensions alone.
In July 2015 HM Treasury issued a consultation “Strengthening the incentive to save: a consultation on pensions tax relief” which prompted a massive reaction from the pensions industry to the possibility of a fundamental change to pensions tax relief. In the run up to the Budget it became apparent that the most radical option (shifting from exempt-exempt-taxed (EET) to taxed-exempt-exempt (TEE)) was no longer being considered but questions remained about whether a flat-rate of tax relief would be introduced instead. In the event, there is no change – for now. Included in the papers published in connection with the Budget is the summary of responses to the consultation. HM Treasury has not commented on the responses.
The new Lifetime ISA (L-ISA) announced in the Budget looks a lot like pensions saving on a TEE basis. From April 2017, individuals aged between 18 and 40 will be able to take out a L-ISA and save up to £4,000 a year and receive a government bonus of 25%. If they keep their savings in the L-ISA to age 60 they can then withdraw some or all of the value of the L-ISA (including the bonus) free of tax. Withdrawals are permitted prior to age 60 but (unless the withdrawal is used to fund a first home purchase) will be subject to a deduction of the bonus, any interest on the bonus and a 5% charge on the remainder of the funds being withdrawn.
It remains to be seen how popular L-ISAs will become as a long-term savings vehicle and what purposes they will be used for by those taking them out. Many savers over 40 may wish they could also take advantage of L-ISA. It is possible L-ISAs could become an alternative to traditional pensions saving and really take off. And then who knows – perhaps the Chancellor will revisit pensions tax relief and TEE will be back on the agenda.