Back on the 4th January 2017, Ros Altmann, the ex-Pensions minister, media commentator and finance blogger posted an article about the potential threats to the current pension structure posed by a change in emphasis by the Treasury, who appear to be pressing the case of the “Lifetime ISA” at the expense of the existing pension regime.
The original article is here, but in summary she is saying that the Treasury wants to change the existing pension model, where tax relief is given on payments into a savings pot to one where tax relief is given when income is drawn. This would bring forward tax receipts for the government, which would be very helpful to the Treasury!
Ros suggests that pensions have two significant advantages to an alternative scenario; firstly, pension are much better that ISAs in terms of the behavioural design, with an incentive to pay in and an incentive to hold to term; and secondly, a pension carries an expectation that funds should be invested for the long term in suitable assets, rather than held as cash.
We have to remember that either construction, a pension or a Lifetime ISA, is an artificial collection of laws and allowances devised by government to encourage consumer savings behaviour that is considered widely beneficial. We are hampered a little by the lack of information about the final form of the Lifetime ISA as little has been published so any comparison to pensions is speculative, but getting people to “do the right thing” is always tricky.
The existing system
At the moment, whatever money you put into a pensions is received gross or with tax added back, any growth is exempt of Income or Capital Gains Tax and once you are over a trigger age, currently 55, you can draw the money with it treated as earned income, subject to personal allowances and a graduated income tax rate. If you die before retirement, your pension money can go to your dependents tax free. There are well understood routes for joint contributions from employers and employees and a long established methodology for life time income in the form of annuities.
The anticipated system
The new Lifetime ISA is anticipated to take the form that premiums will be paid in after tax has been paid, but any gains will be exempt of Income and Capital Gains Tax. Some of the capital can be taken out in the intervening years to pay for expenses like cars, divorces and houses. Upon retirement, income can be taken tax free, so the personal allowance is bypassed.
The first thing worth bearing in mind is that pensions have only recently become a majority sport, with workplace pensions pushing the participation rate to over 50% of the working population only in the last few years.
The next remark worth making is that the bulk of the population is not particularly good at saving in general; the idea of saving for a retirement is hard to grasp at 20, hard to afford between 30 and 50 and rather too late from 50 onwards! It is all too easy to imagine the lifetime ISA being plundered to meet personally desirable expenses before retirement and nothing left in the pot!
As an IFA, I would much prefer the existing system to be left well alone, as changes make people even less likely to make retirement provisions; changes to allowances and more complex rules do not help us to encourage people to make sensible savings.
I also would suggest that Ros’ assertion that ISAs would be more likely to be held as cash is probably true. If there was a chance that the saver was going to dip into their Lifetime ISA before retirement, then investment opportunities would be reduced. In the long term, as growth would be low, the temptation to blow the lot before retirement would be all the more.
I am rapidly coming to the conclusion that either the pension regime should be left alone or we need to look at radical, root and branch reform; the State Pension is a Ponzi scheme, so the Treasury getting a short-term cash flow advantage now is hardly a good reason to fiddle with pensions in general.
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