The announcement of a Lifetime ISA by the UK chancellor yesterday has led the country’s pension fund association to reiterate a call for an independent retirement savings commission.
The Lifetime ISA (Individual Savings Account) was announced by George Osborne as part of the UK Budget, which did not, as widely trailed, include major direct changes to pensions taxation.
However, several in the pensions industry see the chancellor’s move as tax changes “via the back door” and also raised the question of whether the Lifetime ISA will detract from auto-enrolment into workplace pensions schemes. (Click here for more on the UK Budget changes.)
Joanne Segars, chief executive at the Pensions and Lifetime Savings Association (PLSA), said the introduction of a Lifetime ISA is an “interesting” initiative to encourage younger people to add to their retirement savings.
To do this, she added, it is important for regulation of charges and governance of the new savings product to be comparable with those on pensions, “which have been reviewed to make sure they offer savers good value”.
By introducing the Lifetime ISA, the government has “extended the way in which people will be able to save for their retirement”, said Segars.
It should use this “as an opportunity to agree a new consensus for pensions that focuses on the long term, builds confidence and gives savers and employers clarity and stability”.
More specifically, the chancellor should create “a new independent retirement savings commission to tackle that challenge”, she said.
The PLSA, and others, have called for such a body before.
It last made the call in a report published in April last year, when the PLSA was still called the National Association of Pension Funds (NAPF).
The report was backed by a wide range of organisations, including the Association of British Insurers (ABI) and the Trades Union Congress (TUC).
Then, too, the motivation for such a commission, to be permanent, was based on a desire for a “long-term view” of the retirement savings system.
The auto-enrolment policy being rolled out in the UK was first suggested by an independent commission, the Turner Commission.
More recently, a wide-ranging report by David Blake of the Pensions Institute, written at the behest of the opposition Labour party, called for a “Pensions, Care and Savings” commission to provide independent scrutiny of pensions freedoms unveiled in the UK in 2014.
A Trojan Horse?
On the topic of tax, the PLSA’s Segars welcomed the chancellor’s decision not to make changes to pensions tax relief.
However, to the extent that the Lifetime ISA is seen as being equivalent to a Pensions ISA, some have noted that it involves a new type of taxation.
Paul Sweeting, head of research at Legal & General Investment Management, said the Lifetime ISA was “essentially a pensions ISA by another name” and that the tax treatment was very generous.
“[I]f pensions are EET (exempt-exempt-taxed) and ISAs are TEE (taxed-exempt-exempt), then these are essentially EEE – at least for a basic-rate taxpayer under the age of 40, thanks to the 25% bonus the government will put in up to the £4k limit,” he said.
Meanwhile, Lynda Whitney, partner at Aon Hewitt, said decisions on some key issues raised in the chancellor’s pension tax consultation have been deferred, and that the new Lifetime ISA “could well be the Trojan Horse that kills off pensions at a later stage”.
“[W]e fear the mixing of shorter-term saving for house purchase, with longer-term saving for pensions,” she said.
“Will individuals invest in low-risk assets, focusing on protecting the capital value, and so ignore the need to take enough risk to generate returns for a long-term investment like pensions?”
Others noted that private sector employers would welcome the confirmation of pension salary sacrifice.
Kevin Wesbroom, senior partner at Aon Hewitt, said employers were likely to have a range of responses.
Some might want to extend their benefits package to contribute to Lifetime ISAs, while others might want to offer a savings allowance that could be diverted to pensions or Lifetime ISA.
“Other employers will withdraw from pensions and just contribute the auto-enrolment minimum,” he said. “They will welcome wholesale opting out of pensions to fund Lifetime ISAs instead.”