When the Green Paper on ‘Strengthening the Incentive to Save’ was published last Summer we thought that the 2016 Budget might be a momentous one for pensions. Radical reform to pension tax relief was on the table, with the lead options including scrapping tax relief in favour of a pensions ISA regime or a new flat rate of tax relief for all. About ten days before the Budget the Treasury let it be known that radical reform was off the table and so we were expecting a relatively quiet Budget when it came to pensions.
The good news is that we got no further changes to the Lifetime and Annual Allowances, though damaging changes to each is still going ahead in April 2016.
The more mixed news was the creation of the ‘Lifetime ISA’ (LISA) which some see as a Trojan Horse for the abolition of pension tax relief in years to come.
On the face of it, there is little to criticise in a new long-term savings scheme which combines a government top-up with the ability to make withdrawals, albeit with a penalty. This could certainly be an interesting option for advisers to discuss with the self-employed, who are increasingly unwilling to lock themselves in to long-term pension saving but who clearly need more retirement provision than they currently have.
But the big worry (apart from the potential expansion of the LISA into a full-blown pensions ISA for all) is the potential impact on automatic enrolment and pension saving more generally.
The Chancellor indicated that the LISA was being brought forward in part because many of those under 40 “...haven’t had such a good deal from the pension system”. Since we already have a ‘help-to-buy’ ISA to assist young people in raising the deposit for a first home, the LISA was clearly being presented as a ‘house first, pensions next’ product.
The big worry is that younger people, who are unlikely to have much in the way of spare cash, might opt to put all their savings eggs in the LISA basket and opt out of workplace pension saving, especially if they do not benefit from financial advice. If they focus on the LISA and stay with it through their lifetime - as the name suggests! - we estimate that they could lose around £29,000 in employer pension contributions even without taking account of the investment growth on those contributions.
Equally worrying would be if they delay starting to save for a pension until they have bought their first house, perhaps well into their thirties. Just at the point that millions of people in their twenties and thirties have started to build up a workplace pension through automatic enrolment, there is a danger of mass opt-out as the understandable desire to build a deposit for a house becomes the dominant motivation.
It would be deeply regrettable if the desire to have a bold Budget announcement was to undermine the recent growth in workplace pension coverage, one of the biggest social policy successes of the last decade.
Director of Policy and External Communications
Steve Webb is now Director of Policy and External Communications at Royal London. Before this he was Minister of State for Pensions between 2010 and 2015, the longest-serving holder of the post. During that time he implemented major reforms to the state pension system, oversaw the successful introduction of auto enrolment and played a key role in the new pension freedoms implemented in April 2015.