Lifetime ISAs raise 'significant questions' for future of pension saving, says expert

Out-Law News | 18 Oct 2016 | 3:45 pm | 2 min. read

'Lifetime ISAs', which will allow long-term savers to benefit from a government bonus if the money is used for retirement or to purchase a first home, moved "a step closer to reality" this week following the publication of enabling legislation, an expert has said.

The Savings (Government Contributions) Bill had its second reading in the House of Commons on Monday, and will now proceed to committee stage. Once in force, the legislation will introduce lifetime ISAs (LISAs) along with a new Help to Save scheme, aimed at working people in receipt of Universal Credit.

Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said that the potential impact of the LISA on the pensions and lifetime savings markets "should not be underestimated". The new product raised some "very big questions" for policymakers, he said.

"The introduction of the lifetime ISA raises three very significant questions: does it mark the start of a move away from an EET taxation system for pensions? Should we accept, out of necessity or otherwise, that property wealth is now intrinsically linked to pension saving? And is the next logical step to include LISAs within the auto-enrolment framework?" he said.

"In the short term, these questions may be answered by consumer and employer demand as much as anything else. Long term, the policymakers - especially the Treasury - may have other ideas," he said.

The introduction of the LISA was confirmed as part of the March 2016 Budget, and followed a government 'green paper' on potential changes to the pension tax regime. Saving into a pension is tax free as are, for the most part, any investment returns over the lifetime of the pension saving arrangement. Instead, the actual pension income is taxed, creating an 'exempt-exempt-taxed' (EET) system. ISAs, on the other hand, are taxed on a TEE basis, where savings are made from taxable income but then returns and withdrawals are tax exempt.

LISAs will allow those aged between 18 and 40 to save up to £4,000 each year towards the purchase of their first home, or for their retirement. Money paid into the account before the saver turns 50 will be topped up with a 25% bonus from the government.

Savers will be permitted to use the LISA to fund the purchase of a first home up to £450,000 in value, or to withdraw the money once they turn 60 or if terminally ill. Any withdrawals made before this date will forfeit the government bonus and be subject to a small additional charge to discourage the use of the product for purposes other than long-term saving.

More than 200,000 people are expected to save into a LISA in the first year of the new product, increasing to more than 800,000 by 2020/21, according to a Treasury impact assessment. It expects the product to appeal to people who are already saving into an ISA and to those saving for their first home, as well as to people who would otherwise have saved into private pensions but whose "tax and employment status" make the LISA a more attractive option. This could include high earners and the self-employed, according to the impact assessment.

The Treasury has not assumed that any individuals will opt out of their existing workplace pension arrangements in order to save into a LISA. This is in contrast to some MPs and commentators, who have warned that some retirement savers could opt out of their automatic enrolment into a workplace pension scheme in favour of a LISA even where this is not in their best interests