Lifetime Isas? More like Property Pensions
In the run up to the budget, speculation was mounting that pensions would switch to either a flat-rate system, where all people got the same amount of tax relief on their pensions contributions, or a pensions Isa system, where there was no tax relief on money when it was saved, but money could be taken out tax free in retirement.
Both alternatives were shot down by the industry, and in the end the pension rules didn’t change this time. Given how much retirement savings rules have been shaken up recently, this is welcome.
Instead, the Chancellor’s big reveal was a new individual savings account, the Lifetime Isa, which offers people a flexible tax-efficient way to save for a property or retirement.
That’s what we’re supposed to think anyway, but the reality is the Lifetime Isa is more like a new pension system, with flat-rate relief, Isa-style free access in retirement and early access for first property purchases.
It smacks of a pilot scheme for a new pensions regime, disguised as an Isa to take advantage of the latter's popularity and avoid more accusations of messing with the pensions rules.
Isas are undeniably the more popular savings wrapper, and their appeal may help draw people in. But a big part of their popularity lies in their simplicity, and the Lifetime Isa could undermine that reputation.
That’s not to say Lifetime Isas are bad though. They have some great perks, and are more generous than pensions from a tax perspective. Company pensions are still better for long term saving, due to the incredibly valuable company contributions up for grabs.
Basic rate taxpayers will get the same uplift at the end of the tax year as they would via tax relief on a pension when they save into a lifetime Isa (£1 bonus for every £4 put in). But the lifetime Isa has the added bonus of completely tax-free access in retirement, or when buying a house. Only the first 25% of money saved in a pension is tax-free in retirement.
For higher rate taxpayers it’s a little more complex. They’ll get less up-front relief with a Lifetime Isa, getting just £1 for every £4 invested, compared to £2.66 for every £4 they put in a pension. And the £4,000 annual limit on contributions won’t be enough to generate a retirement income that satisfies higher earners.
But people who pay 40% income tax will still want to seriously consider the Lifetime Isa as part of their retirement plans, given the tax-free access after 60, and the option to cash in for a property purchase.
And unlike the vast majority of support for house buyers, the Lifetime Isa isn’t just for first-time buyers – it’s available to anyone under 40 when the scheme launches in April 2017. That gives it a big advantage over recently-launched Help to Buy Isas.
It has other benefits over the Help to Buy Isa too. Firstly, Lifetime Isas can be invested, opening up the possibility of much better returns on your money. Secondly, the annual limit on contributions is £4,000, while people can only put £200 a month into a Help to Buy Isa (Plus £1,000 when the account is set up). Finally, Lifetime Isas get tax-relief up front, so that money can generate an investment return. With the Help to Buy Isa, the free-government cash is only added at the end.
All of these reasons make me cautiously optimistic about Lifetime Isas. But if they're to succeed in their aim of getting people saving for the long term, it's vital future budgets don't tinker with the benefits and put people off.
The devil will be in the detail, and Lifetime Isas won’t suit everyone. But we'd be better off calling them Property Pensions, because that's far closer to what they are.