The latest ISA model rolling off the Treasury conveyer belt this week spells good news for UK savers under 40.
Despite expectations that political constraints imposed by the upcoming EU referendum would make the Budget something of a damp squib, Chancellor George Osborne nevertheless managed to dish out some rather tasty treats for savers and investors on Wednesday.
While Osborne may have taken the fizz out of the sugary drinks market to the delight of Jamie Oliver and co, he handed out some financial sweeteners of his own that should please those saving for retirement or a home.
The surprise announcement of a Lifetime Isa was one of the standout measures and will be cheered by younger people. With savers under the age of 40 given £1 for every £4 saved up to a total of £4,000 per year – equating to a maximum annual bonus of £1,000 – it will undoubtedly help those wanting to save for retirement or take a step closer to getting on the housing ladder.
In addition, savers will not pay tax on interest earned. While a 5% early exit fee (applied to those withdrawing cash before they reach 60 years of age or who spend it on something other than a home) may provide something of a sting in the tail, the introduction is a boost to young savers.
The announcement of the Lifetime Isa – billed as a “radical new way for the next generation to save” – was accompanied by an increase in the Isa allowance to £20,000. And these two measures, both effective from April 2017, should be seen in the same light: they will accelerate the move away from pensions and toward Isas as part of a fundamental realignment of the retirement landscape.
In many ways this makes sense – pensions are confusing, complex and unappealing to large swathes of the population both young and old. The constant tampering and tinkering with the system has made pensions difficult to understand for many. Meanwhile, other products have come to market offering attractive ways to save for retirement.
Some experts think Wednesday’s announcement of the Lifetime Isa fired the starting gun for the eventual abolition of pension tax relief altogether. While this may be so, the speed of change will be more evolution than revolution – the pension system is still going to be around for a good few years yet. However, the Isa has undoubtedly started an assault on the market that could see it become the retirement product of choice for future generations.
The threat posed by the Isa to the pension market was laid bare by Osborne when outlining the benefits of the new Lifetime Isa.
“Unlike a pension you won’t pay tax when you come to take your money out in retirement,” the Chancellor said in the Budget. “For the self-employed, it’s the kind of support they simply cannot get from the pensions system today. Unlike a pension you can access your money anytime without the bonus and with a small charge.”
The Lifetime Isa comes on the back of the Help to Buy Isa, which is due to end in November 2019. And the Lifetime Isa was announced in a Budget that until very recently was expected to give birth to the Pension Isa. Furthermore, let’s not forget about the Innovative Finance Isa, due to come to market in April, which will enable savers utilizing peer-to-peer lending platforms to benefit from tax-free interest at potentially attractive rates.
The Isa market is clearly at the forefront of Chancellor George Osborne’s efforts to overhaul the UK savings culture as he looks to introduce flexibility and innovation into the product. In the 2015 Budget, Osborne hailed the “radically more flexible Isa” as part of a “savings revolution” alongside the new pension freedoms.
While the expansion of the Isa into the housing, peer-to-peer lending and retirement sectors should help improve its appeal – and possibly benefit certain sectors of the economy – the product also runs the risk of falling into the same trap as pensions by becoming overly complicated. Savers already struggling to choose what pension scheme is best may not welcome the addition of more products to the (rather unappetising) retirement menu. The choice of whether to save through a pension, traditional Isa or Lifetime Isa – or a combination of all three – could make a hard decision that much harder.
The increasing complexity of the Isa is also a function of its constant rebranding by Osborne. The Lifetime Isa has echoes of both the Help to Buy Isa and the mooted but booted Pension Isa and could even be considered a type of hybrid of the two. Some experts think the announcement of the Lifetime Isa was simply a way for Osborne to sneak in the Pension Isa via the back door.
Concerns have also been raised that the Lifetime Isa could discourage people from saving for retirement via a workplace pension. This could potentially impact auto enrolment just as the process enters a crucial phase, with hundreds of thousands of small employers set to get on board.
The new Lifetime Isa has been met with a somewhat mixed response by the industry at large but it should help younger people save for a home and save for retirement. And that can only be a good thing. So hats off to George!