So despite all the pre-Budget spin and counter-intelligence George Osborne chose to make a major pensions policy announcement anyway. Only the mean-spirited would deny that it was a cunning political move to side-step the major taxation decisions on pensions by effectively leaving them untouched. Instead the Chancellor introduced a competitor to pension plans in the form of the Lifetime Individual Savings Account (LISA).
So is this new initiative a pension or an ISA? In truth neither, LISA is in fact different to all the other investments out there.
Let me explain.
The full title of LISA suggests that this is merely an extension of the Individual Savings Accounts regime, but with an additional level of government incentive in the form of “bonus” contributions. And indeed LISA will be subject to the same annual maximums of that savings type. Yet a principle tenet of ISAs was accessibility, and a brief look at the finer details of LISA makes it evident that this is genuinely not the case here. The money is only available without penalty from age 60, or in the use of an earlier house purchase. The penalty for accessing the funds outside of these parameters is heavy indeed, the full loss of the government “bonus” contributions (including any growth on this element), and a 5% penalty in addition. So for many modest savers the fund could decrease by more than half overnight if access were needed.
So if LISA is not an ISA, is it perhaps more akin to a pension instead? Not really. With an access age of 60 it is perhaps more restrictive than pension plans which (as a result of yet more Osborne led initiatives) are now accessible from age 55. And although LISA does indeed benefit from a bonus contribution equivalent to that of Basic Rate Tax, this is capped at £1,000 per year, and importantly (and very strangely) this bonus stops from age 50 onwards. Many who start saving with LISA’s and don’t ever achieve the British obsession with house purchase may well have been significantly better off in a pension over time. However this assumes that pension tax-reliefs will remain unchanged in the long term, which is realistically rather unlikely.
So LISA is indeed different to either of the options that the average saver has previously encountered. But is it alluring enough to attract enough money away from their current partner of pensions?
In reality LISA may well be more attractive to savers without the benefit of a company pension contribution, who therefore have a more marginal financial calculation to make. And given that LISA is free of tax at age 60 they may well favour the newer option.
What of the rest? Increasingly larger slices of the UK population are saving in company sponsored pension arrangements as a result of Auto-Enrolment. To redirect core pension contributions to LISA will require their undertaking an opt-out process and the loss of company contributions. It’s possible that such hurdles may well deter all but those with a very strong plan to purchase a house in the foreseeable future. Yet it is perhaps probable that many younger savers will choose to redirect their non-core voluntary pension contributions to LISA instead.
Despite my reservations around some aspects of this new product, it is already clear from anecdotal feedback that younger savers are excited by the prospect of this initiative. Of course they still have another year to wait until its introduction, and it is possible that the less striking – but still rather effective – Help to Buy ISA may benefit from increased contributions during this period.
Whether the savings industry welcomes this newcomer or not, it is perhaps undeniable that this may be the first step towards a more flexible and less Treasury expensive solution for all long-term savings. There really is something rather intriguing about LISA.
Steve Herbert is Head of Benefits Strategy at Jelf Employee Benefits