The 2015 Budget brought with it the brave (and unexpected) new world of pension freedoms. Until we were stood down last week, the pensions industry was gearing up for further seismic pensions changes in this year’s Budget. In the event, the changes made were less about pensions and more about social saving concerns. They certainly didn’t register on the Richter Scale. We didn’t learn much more about the Government’s long term plans for retirement savings, and we would suggest that making changes to pensions in order to save money is still very much on the Chancellor’s agenda for this Parliament.
Most notably, George Osborne introduced what he claims will be a completely new flexible way for the next generation to save, the lifetime ISA. So how will this new product fit in alongside the current inhabitants of the pensions and savings world?
A stay of execution on tax relief…
The Government had promised that the Budget would include an announcement on the outcome of HM Treasury’s consultation on pensions tax relief. The consultation paper floated the possibility of moving from the current EET (exempt, exempt, taxed) system of applying tax relief to pensions as money goes into a pension, remains in a pension and exits a pension, to a TEE (taxed, exempt, exempt) system.
The Treasury has published a summary of responses to the consultation and communicated its own response in the Budget. No decisions have been taken because no-one agrees on how to proceed. However, it has been suggested that introducing the new lifetime ISA will address some of the issues raised in the consultation, in particular the concern that young people are not saving enough. Although isn’t that what auto enrolment was designed to address?
…but is the ISA the latest nail in the pensions coffin, or just another member of the pensions family?
A new lifetime ISA will be available from April 2017 for adults under the age of 40. They will be able to contribute up to £4,000 per year into the tax-free ISA and will receive a hefty 25% bonus at the end of each tax year on contributions made before the individual’s 50th birthday.
Funds, including the bonus, can be withdrawn at any time from age 60 or be used to buy a first home (up to the value of £450,000) at any time from 12 months after the account is opened. Lifetime ISA funds may be withdrawn at any time for other purposes, with no bonus and subject to a 5% charge (this despite the current scrutiny of exit charges made on pension products and the introduction of more flexible pensions access last year). Young people will most likely have to consider whether they will be better off remaining automatically enrolled in a pension scheme or investing in this new product.
In parallel the overall annual ISA subscription limit will be increased to £20,000 from 6 April 2017 (up from the £15,240 applying in 2016/17).
Another reprieve granted for salary sacrifice
Ever on the hunt for that Budget surplus, the Government is considering limiting the range of benefits that attract income tax and National Insurance advantages when they are provided as part of salary sacrifice schemes. However for now at least, pension saving (together with childcare and health-related benefits) will continue to benefit from savings on income tax and National Insurance Contributions when provided through salary sacrifice arrangements.
So what does the pensions future look like?
The Government intends to launch a ‘pensions dashboard’ by 2019. This will be a digital system where an individual can review all their retirement savings in one place (remember the national NHS computer system?). In a world where final salary pensions are the exception rather than the norm, the country’s focus must be on ensuring that systems are in place to encourage adequate retirement saving among emerging generations. In the same way that an individual will be given an overview of their retirement savings, the Government must also take a wider look at how the individual pieces of the pensions and savings jigsaw fit together. The aim should be to achieve adequate retirement saving, through a joined up approach which can be understood by the UK workforce.