The main headline from the 2016 Budget was the introduction of a new lifetime ISA (LISA) for the under 40s from 6 April 2017. The government are essentially dipping their toe in the water to gauge take up and popularity. If it flies, it could have a significant impact on the UK’s current pension system.
The ability to save up to £4,000 a year from taxed income into a Lifetime ISA and earn a 25% ‘bonus’ from the government for each pound saved up to the age of 50 may be attractive. The big selling point, however, is that funds saved (including the bonus) can be withdrawn at any time and applied toward the purchase of a first property that is under £450,000, or withdrawn tax free after age 60. Like a standard ISA, funds can be accessed at any time before age 60 but the government bonus will be lost. Depending on the outcome of a consultation, it may be that funds (including the bonus) can be withdrawn early for other specific life events too.
LISA could be an appealing alternative method of saving for self-employed, as well as employees who are excluded from the auto enrolment regime due to earnings. If it does prove popular, will we see a relaxation in some of the age and contribution restrictions?
To counter this, would the government increase restrictions on standard pension provision, ie lower the annual and lifetime allowances even further? Contributions to LISA count against the ISA allowance (currently £20,000) but not the pension annual allowance.
Before we know it, the government may have implemented the much muted ‘TEE’ pension tax system, where contributions are taxed but investment and benefits are tax exempt, by the back door.
And where would this leave automatic enrolment? Perhaps regulations might be changed to allow LISA products to be qualifying schemes if the age restrictions are relaxed and employer contributions allowed…
One thing that’s clear to me is if LISA does prove popular it will be to the detriment of traditional pension provision. I am sorry to say it, but the temptation to spend the LISA fund before retirement will be too great for many people (and the likelihood of them paying it back, if they are allowed to, will be slim). This will only lead to increased poverty in old age and individuals having to work longer than they expected or wanted to.
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