The 2016 Budget was always going to be about new ways to encourage saving and new types of pensions tax relief.
Although the Chancellor pulled back from changing the tax relief rules for pensions, he has announced a new way of saving for the under 40s.
From next April, anyone aged 18 to 40 can take out a Lifetime ISA and pay in up to £4,000 a year, receiving a ‘25% bonus’ from the government of up to £1,000 a year. This is theirs to keep as long as they put the proceeds towards buying their first house or take it out after age 60.
But any other withdrawals will see them lose the bonus and will incur a 5% charge.
The government’s idea is that this will help those struggling with saving for both a house and for retirement. But in reality, it means the under 40s now have a choice between a pension and the Lifetime ISA.
Misunderstood
No doubt many will be enticed by the offer of a 25% bonus but that just proves how misunderstood pensions really are. Tax relief of 20% on contributions for a basic rate taxpayer offers the same level of incentive.
The things that will really swing it for the generation Y saver is probably going to be withdrawals, which will be tax-free after 60 from the Lifetime ISA and the promise of easy access (although with penalties) if they really need the funds before they reach 60.
What is worrying is that in their rush to secure a new Lifetime ISA the saver might just forget the many things a pension can do, like receiving employer contributions and higher rate tax relief, which are two obvious and significant advantages of a pension.
In addition, many will need to save more than the £5,000 p.a. maximum Lifetime ISA contribution, including bonus, to achieve their retirement objectives and why would anyone save to the Lifetime ISA after age 50 when the government stops adding bonuses?
The danger but likely use of the Lifetime ISA is that people will simply fund it until they have sufficient funds to buy their first home and withdraw all their savings at that point.
Playing catch-up
The question then becomes, particularly for the older first-time buyer, will they have enough time to make sufficient savings for their retirement?
In an ideal world people would have some short and long-term savings but with the Lifetime ISA the choice will invariably be between buying a house or leaving some/all of their savings where they are to build a bigger retirement fund.
The other danger of combining short and longer term savings, in the Lifetime ISA, is that it could encourage more defensive investment behaviour to protect capital for a potential house purchase, but missing out on the long-term investment returns available and needed for retirement savings.
The Treasury also used this Budget to respond to some aspects of the recent Financial Advice Market Review (FAMR).
It wants to increase the tax and National Insurance contribution relief amount for employer-arranged advice from £150 a person to £500. This move should encourage a greater supply of advice solutions for the corporate market and also increase employer awareness about what they can do to help their workforce prepare for and take the tough decisions on retirement income.
Wake-up packs and default ‘one-size-fits-all’ investment approaches aren’t working and it’s obvious we need other solutions, including regulated advice.
Employers don’t necessarily need to stretch to the full £500 – there are advice propositions already out there working at the current £150 allowance that can help them.
But this is an area where employers need to step up to the plate and hopefully the increased limit and awareness of the allowance should give them the nudge to start thinking about what they can do to help their workforce.
The other key advice element was the government’s intention to consult on whether to introduce a pension advice allowance. This will enable pension savers under age 55 to access up to £500 of their pension savings tax-free to pay for pension advice.
Although, it’s hard to knock anything that encourages and helps people to seek advice, it’s doubtful many people will be able to get the proper help they need at age 55 from a single one-off advice session.
Sad truth
The sad truth is too many people still think financial advice does not represent good value for money and if they were to pay for it they would baulk at a cost of £500.
Until we tackle this central dilemma that people don’t understand what is really involved with getting advice and what it can achieve for them and their families and the protection it offers, there won’t ever be the demand for the service.
Andrew Pennie is head of pathways at Intelligent Pensions
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