4th August 2014
The government has been urged to scrap pensions and put in place a ‘lifetime ISA’ that follows a person from cradle to grave.
A new report from the think-tank Centre for Policy Studies authored by pensions expert Michael Johnson states the government has not gone far enough to kickstart a savings culture in the UK.
Johnson warns the country is ‘perilously close to a capital crisis’ due to Briton’s personal debt levels, which are higher than any other nation at 115% of average earnings that leaves many exposed to rising interest rates and unable to cope with increased consumption.
In order to turn the nation into spenders instead of savers, Johnson proposes a radical set of measures. This includes merging the cash and stocks and shares ISAs into a single ‘lifetime ISA’ , which would also have junior ISAs merged into it, in order to simplify savings.
When a child is born they would be issued with a lifetime ISA, a single account that would negate the need for a pension but encourage lifetime savings.
As the government would no longer be paying pensions tax relief Johnson said it would be realistic that for every £1 saved in the lifetime ISA, the government would contribute 50p up to an annual allowance of £8,000.
‘This Treasury incentive, capped at £4,000, would be paid irrespective of the saver’s taxpaying status,’ he said. ‘A total of £12,000 per annum is more than sufficient savings capacity for over 90% of the population. The incentive would replace today’s tax relief regime.’
Access to savings in the lifetime ISA would be allowed but limited, with original contributions accessible before age 60.
‘The lifetime ISA would provide a degree of ready access to savings while simultaneously justifying the Treasury incentive, which demands a term commitment to saving,’ said Johnson. ‘Withdrawals pre-60 would be limited to original contributions – not capital gains or accumulated income – provided that 50p were first repaid to the Treasury per-£1 withdrawn. Post-60 withdrawals would be taxed at the saver’s marginal rate of income tax.’
The CPS argues that a lifetime ISA would not only encourage saving generally but specifically help ‘Generation Y’ with retirement saving.