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Lifetime ISAs – a Pensions Trojan Horse?

Written By: Mark Cooper on March 25, 2016 No Comment

Looking aheadIn a curiously give-away Budget, most unusual so early in the 5 year electoral cycle, Chancellor George Osborne announced the introduction of the Lifetime ISA for the under 40s to be introduced from April 2017.

In a nutshell young adults between 18 and 40 will be able to contribute £4,000 per year and receive a 25% bonus on contributions from the Government at the end of each tax year.

They will be able to withdraw funds from their Lifetime ISA, including the Government bonuses added, for any reason from age 60 onwards. Any withdrawals before age 60 will be subject to a clawback of the Government bonuses and a 5% exit charge. There will however to be two exceptions:

  • Withdrawals before age 60 to be used for the purpose of purchasing a first home valued at up to £450,000 will be penalty free and include the Government bonuses after 12 months.
  • Similar withdrawals will be permitted in the event of terminal ill-health.

Noteworthy too is the Inheritance Tax treatment on death which will be the same as all ISAs – the fund will form part of the deceased’s Estate. This is in marked contrast to Pensions where the fund on death sits outside of the Estate.

What do we make of it all?

Like much of the Budget it is a mixed and confused message, seemingly encouraging retirement savings for the young, yet inviting them to rip the heart out of it to fund a home purchase in an ever-spiraling house market. Is the motive then to help younger people save for their life after work or another ingenious way to support a UK housing market that has long-since beared any relation to the conventional salary-related pricing structure?

Where too does this leave Workplace Pensions, an ongoing initiative just reaching the critical stage where millions of smaller employers are compelled to enrol employees into a conventional Pension Plan, with any access at all restricted to age 55 for all and higher for younger members? Notwithstanding the loss of employer contributions, the ability of the employee to opt-out will surely have greater appeal to younger potential or existing members, given the availability of early access within the Lifetime ISA? A rise in opt-outs from the already depressingly high 10% would surely undermine and increasingly defeat the object of Workplce Pensions?

The answer, I believe, is that Lifetime ISAs actually give us a first glimpse of the future for all Pensions. Flat rate tax-relief going in, access in part or in full from age 60 onwards (tax-free until a future Government decides otherwise), the residual fund forming part of the Estate on death and a simplicity that would eventually remove layer upon layer of rules and limits of baffling complexity to the layman and even many who purport to understand them.

It won’t happen over-night and is perhaps unlikely to change any pension plans and scheme benefits already in progress, but the Lifetime ISA is almost undoubtedly the Pensions Trojan Horse delivered as a gift to the young by a cunning and quietly assured Chancellor who history may well record as the Pensions smiling assasin.