The UK government has shied away from a complete overhaul of pension taxation, but it stands accused of introducing reforms “via the back door”.
The shift to a taxed-exempt-exempt (TEE) model over the current exempt-exempt-taxed (EET) model was widely feared after chancellor of the Exchequer George Osborne last year launched a review of taxation and signalled his interest in promoting individual savings accounts (ISAs).
During his 2016 Budget speech, Osborne today nevertheless announced the introduction of a Lifetime ISA, which would allow those under 40 to save up to £4,000 (€5,120) annually and receive tax relief of 25%.
Osborne sought to highlight the perceived benefits of the vehicle compared with existing occupational and third-pillar products by noting its use of TEE.
“For the basic rate taxpayer, [the Lifetime ISA] is the equivalent of tax-free savings into a pension, and, unlike a pension, you won’t pay tax when you come to take your money out in retirement.”
He added that the ISA would offer self-employed workers “the kind of support they simply cannot get from the pensions system today”.
Additionally, those saving into a Lifetime ISA will be able to access their savings to buy a property costing up to £450,000.
The Treasury said it would consider whether to allow access to the savings for other life events, similar to employer-provided 401k accounts used in the US.
But the pensions industry was quick to note that the launch of the Lifetime ISA from 2017 was akin to introducing TEE “via the back door”.
Simon Laight, pensions partner at law firm Pinsent Masons, said Osborne had “cleverly sidestepped” the looming backlash of reforming taxation.
“Rather than compulsorily making the change to a tax-exempt-exempt system, he has made it voluntary,” Laight said, adding that the target market of savers under 40 would now be likely to “shy away” from products still using the existing EET system.
“Less money going into EET means lowering the chancellor’s yearly tax relief spend,” he said. “It brings forward tax receipts. He has brought in limited TEE via the back door.”
Consultancy LCP similarly viewed the Lifetime ISA model as paving the way for a full reform of pension taxation “once the dust has settled”.
For his part, Darren Philp, director of master trust policy at The People’s Pension, questioned what impact the change would have on auto-enrolment.
“Auto-enrolment relies on inertia and has so far been popular,” he said, noting the current low levels of opt-outs.
“We already know people are stretched financially, and the attraction of the flexibility offered by a lifetime ISA may make it an ‘either/or’ for savers.”
Pensions Dashboard and LGPS reform
The Budget also endorsed proposals by the Financial Advice Market Review – a joint Treasury and Financial Conduct Authority project published earlier this week – to introduce a pensions dashboard by 2019.
The initiative, which the Treasury said would be funded by the industry, will see the establishment of a web portal displaying an individual’s pension savings, mirroring the approach of similar projects in the Netherlands, Denmark and Belgium.
It also threw its support behind the reform of the local government pension schemes (LGPS), which have recently been discussing the creation of seven or eight asset pools formed through collaboration between the 89 funds within England and Wales.
Notably, it backed the creation of an LGPS “infrastructure investment platform”, likely to be similar to the proposals for an infrastructure clearinghouse put forward by the Greater Manchester Pension Fund and the London Pensions Fund Authority.