From PISA to LISA – Aegon’s view on new saving option
Steven Cameron, Pensions Director at Aegon, said: “Although the Chancellor ultimately resisted the introduction of a Pension ISA, today’s budget shows how attached he’s become to introducing a competitor for pensions in the form of the Lifetime ISA or LISA. Pitched at under 40s, it underlines his mantra of producing a budget for future generations. It’s aimed at increasing flexibility to save with the added attraction of being accessible for a first time house purchase. While this adds further choice it also introduces greater complexity for those aiming to start their saving for retirement.
“There is a huge risk that the LISA will encourage some under 40s to turn down the opportunity to be auto-enrolled into a workplace pension, even though that comes not only with the equivalent 25% Government bonus on personal contributions, but also with an extremely valuable employer contribution. Employers will not be allowed to pay into LISA. The self-employed don’t benefit from an employer contribution so LISA may suit them, and encourage earlier engagement with retirement savings.
“Given the housing challenge young people face today, anything which ‘helps to buy’ will be attractive, but it also creates the real risk that LISA will rarely be used for retirement savings and instead we’ll see accounts depleted as soon as they have built up enough to pay a house deposit. If that happens, and contributions to other pensions have ceased, we’ll have a generation even less prepared for retirement, and who may end up reliant on state pensions which of course are paid by the next again generation. That’s doesn’t seem consistent with the ‘next generation’ focus.”
Budget Comment: ACA chairman questions long-term viability of current pension tax regime and queries impact of lifetime ISA
Reflecting on the decision by the Chancellor, George Osborne, to reject radical pension tax reform in the budget, David Fairs, Chairman of the Association of Consulting Actuaries (ACA) wonders whether the pensions industry is right to be so pleased. The introduction of the Lifetime ISA may challenge and conflict with other pension savings products and boost opt-outs from auto-enrolment pension schemes.
ACA Chairman, David Fairs comments: “Moving away from the existing tax regime would have created undoubted upheaval and would have required major changes to payroll and pension administration systems and a new level of interaction with HMRC although that would have been more streamlined when digital tax accounts are fully on stream.
“We are left with the current system where individual, employers and the pensions industry are struggling to get to grips with the enormous complexity of the tapered annual allowance and the previously announced reduced Lifetime Allowance of £1m, a sum that sounds enormous but which is beginning to impact not just the very well paid but doctors, senior nurses, teachers and swathes of middle management. Our research in 2015[1] found many schemes are losing members due to the complexity of the pension tax regime and concerns over personal tax implications.
“The Pensions Industry can breathe a sigh of relief that it has not been hit by enormous complexity of a move to flat rate or a Pensions ISA but it will be interesting to see how long a Chancellor can or will leave the current level of incentives untouched. With a system now so complex that even many pension professionals don’t fully understand, how long will it be before we wish that a bolder Chancellor would introduce a simpler system?
“We welcome the increase from £150 to £500 in the allowance for pension advice funded by employers.
“Whilst we support an initiative that looks to boost flexible savings for those aged under 40, it is difficult to see how this will sit comfortably alongside other pension saving schemes and products. We wonder whether this initiative will undermine auto-enrolment and lead to more young people opting-out in favour of a more flexible savings product. The Government may need to consider whether auto-enrolment contributions should be allowed into Lifetime ISAs.”
Budget 2016 - Lifetime ISA introduced and a rise in ISA limit, what does it mean for pensions?
On the introduction of a new Lifetime ISA for younger savers and rise in the overall ISA limit to £20,000 per annum, Philip Smith, pensions partner at PwC, said:
"As we predicted pre-Budget, although George Osborne felt the time wasn't right for major pension reform, the race is far from over. Our recent citizens' jury on inter-generational fairness highlighted the demand for savings products that help people save for a home whilst building for the long-term. Today's announcements mark the start, not the end, of the story in getting people to save more for their long-term future.
"Market forces are now likely to drive more younger savers towards ISAs and away from pensions, a trend that will be accelerated if the Chancellor goes ahead with the type of flexibility offered in the US that allows savers to withdraw savings and repay later. It's interesting that older savers have not been included in the new Lifetime ISA. This may point to a future dual track system, leaving the current pension system in place, but introducing the pension ISA by stealth. Once the market beds down, a change to a fully fledged pension ISA becomes much easier.
"It will be interesting to see the impact on the auto-enrolment market, and employers' reward strategies as pension saving for those under 40 has just become a whole lot less attractive. For those with a significant proportion of millennials in the workforce, a key question will be whether or not to introduce a Lifetime ISA alongside an auto-enrolment pension. Employers that offer pension and Lifetime ISA from a single platform could be the big winners as the pension reform race heats up."
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