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UK 2016 Budget: Beware of chancellors bearing ISAs

UK 2016 Budget: Beware of chancellors bearing ISAs

There was much talk before the budget about shelving major pension changes.  The atmosphere in the midst of the great Brexit debate was seen as unpropitious for a major upheaval in the pensions market, traditionally beloved by a large segment of the Tory-voting base.

However, Chancellor Osborne, who clearly wants to go down in history as a reforming Chancellor, is not one to back off major changes and just deliver a steady-as-she-goes budget.

This dampening down of expectations did mean that he was in a position to spring a surprise on the financial services sector – in the form of a new Lifetime ISA.  This ISA, which gives a government bonus of 25% each year to any savings up to £4000 p.a., is available for the under-40s and the bonus will be provided until the ISA-holder is 50.  The product will allow the money to be taken out tax-free for a house deposit for example, although money withdrawn would lose the right to a bonus.  Future research is taking place in order to see whether money returned into the account can reclaim the bonus, similar to the US’s 401K plans.

It is interesting that the Chancellor referred to this in his speech as a solution to the dilemma of whether to save for a house or for a pension, as he clearly has retirement in mind with this new product.   Having been forced to back off the introduction of a pension ISA, he has quickly moved to put in a lifetime ISA, with many of the features of the previously mooted pension ISA.  This will facilitate the introduction of a Pension ISA in a later budget, once the referendum is safely out of the way.

In the meantime, employees with 20% tax relief on their pension may well be tempted by a 25% top-up, even though the net effect on their income is identical.  This may please employers, as those who opt-out of workplace pensions to invest in a Lifetime ISA instead will lose the employer contribution.  Indeed, pity the poor lower-paid worker who only has a small amount to save and now has to work out whether this is best put in a Lifetime ISA, a Help-to-Buy ISA, a workplace pension, a standard ISA or into the Help-to-Save scheme.

Whilst the details of the rules surrounding the Lifetime ISA are yet to emerge, the complication of the rules around savings will mean that the government guidance service will have to get involved if those on lower-incomes, who can’t afford financial advice, are to be in a position to make a good decision on where to channel their savings.

As an expansion to the savings option the Lifetime ISA is to be welcomed, but if it turns out to be a Trojan horse, delivering a complete revision of the pension market, then we are going to see a lot more turbulence in the UK pension market in the next few years.

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