The new Lifetime ISA and a huge leap to £20k for the ISA allowance are two of the most radical changes to have been announced by chancellor George Osborne (pictured) in yesterday’s Budget, according to experts. 
Osborne has long voiced his concerns over the lack of savings culture among young people and the potentially catastrophic consequences this could bring about in terms of providing later life care for an ageing population.
In an effort to solve this, the chancellor announced a new product to help those under 40 save for their first home or retirement, with the government promising to boost any cash put aside.
“We know people like ISAs – because they are simple. You save out of taxed income; everything you earn on your savings is tax-free; then it’s tax-free when you withdraw it too,” Osborne said.
“For those under 40, many of whom haven’t had such a good deal from the pension system, I am introducing a completely new flexible way for the next generation to save. It’s called the Lifetime ISA. Young people can put money in, get a government bonus, and use it either to buy their first home or save for their retirement.”
In brief, the Budget states that:
1. The ISA limit will increase from £15,240 to £20,000 from 6 April 2017;2. A Lifetime ISA will be introduced in April 2017;
3. This will allow under-40s to save up to £4,000 a year and receive a government bonus of up to £1,000 a year until age 50;
4. Money can be withdraw to purchase a new home or after 60; redeeming early incurs some penalties;
Despite the fever of excitement around the new opportunities for investors and savers, opinion is divided as whether this is a good or bad move for investors and particularly whether this could be the end of pensions as we currently know them.
Tony Stenning, head of retirement for Europe at BlackRock, said: “The introduction of the Lifetime ISA should be congratulated. Not only does the Lifetime ISA cater for people trying to save towards their retirement but it also provides help to first-time buyers. Given rising property prices and the challenges this presents people in trying to get a foot on the property ladder, the linkage of long-term savings and your house purchase is a welcome move.”
Adrian Lowcock, head of investing at AXA Self Investor, thinks the new Lifetime ISA could be a boon to younger generations currently avoiding saving and investing for their pensions. However, he is concerned that the ISA system could become too complicated with the arrival of another product.
“On the surface the Lifetime ISA looks to be a good thing as it aims to address the issues that face young savers, who have been put off by the lack of accessibility and complexity of pensions,” he said.
“However, in the space of a few short years we will have gone from having two simple ISA choices to at least five ISA options. How these ISAs, and the tax allowances associated with them, interact with each other is already becoming increasingly complicated and confusing for investors and savers.”
Elliott Silk, head of employee benefits at Sanlam agrees. He said: “While the new Lifetime ISA is a positive move in giving people more options for saving, it adds to an already complex pensions landscape that people just do not understand.”
The Lifetime ISA
Source: HM Treasury
Lowcock also thinks the new product could be the fore-runner to a ‘pensions ISA’, something hinted at in recent years.
“Whilst we have a relative period of calm for pensions now, I suspect this could be temporary. From 2017 savers and investor under the age of 40 may face a difficult choice of deciding whether it is better for them to take out a Lifetime ISA or to make a personal pension contribution.”
He says for basic rate taxpayers whether these products are more tax efficient will depend on how they make their pension contributions.
“Salary sacrifice into a pension would provide more attractive tax relief, due to National Insurance Contributions, than payment into a Lifetime ISA, while the opposite would be true for any lump sum contributions made out of existing savings or taxed income,” he said.
“Raising the ISA allowance to £20,000 next year is of course welcome, but only a few people are able to use their maximum ISA allowance currently.”
“This further increase to the ISA allowance suggests that the government are getting ready for the Pension ISA but risks ISAs becoming overly generous to the wealthy and putting them at the forefront for further changes by future governments.”
Chelsea Financial’s Darius McDermott is an admirer of the measures introduced by Osborne, as he thinks the move to a singular vehicle will be beneficial.
“Is this the first step in a journey to a single, simple savings vehicle? If it is, I'm all for it. The less complicated and more joined up the better. It looks like a no-brainer for the majority of under 40s – at least for their first £4,000 of annual savings,” he said.
Ian Sayers, chief executive of the Association of Investment Companies (AIC), is another saying the news is positive for is long overdue help for under-40s.
“The Lifetime ISA is long overdue help for under-40s to save for their future – whether that’s a home or long-term saving for retirement. This is an opportunity to generate a savings culture and boost long-term share ownership amongst millennials.”
Catherine Doyle, head of defined contribution at Newton Asset Management, however, thinks the Lifetime ISA could encourage short-termism.
“The chancellor has gone one step further with his flexibilities and accelerated the ‘retailisation’ of our pensions and savings culture. While elements of the changes are positive such as the increased freedom and a broadening of the savings culture, the introduction of Lifetime ISAs for the under 40s may encourage a less long-term approach as their savings will no longer be locked up,” she said.
However, the changes are likely to represent more of “a bolt-on” to traditional defined contribution savings, she says.
“There remains a number of open questions including how auto-enrolment will fit in the new structure, fund choices and whether a fee cap will apply. As always, the devil is in the detail,” she said.
Lynda Whitney, partner at management consultancy Aon Hewitt, goes further and warns “the new Lifetime ISA may be welcome, but it could well be the Trojan Horse that kills off pensions at a later stage”.
“The Lifetime ISA is to be welcomed as it addresses the need to engage with young people to save for the future,” she added.
“However we fear the mixing of shorter term saving for house purchase, with longer term saving for pensions. Will individuals invest in low risk assets, focusing on protecting the capital value, and so ignore the need to take enough risk to generate returns for a long-term investment like pensions?”
“Lifetime ISAs will represent the better saving option for many low-paid employees. For others the decision may be less clear cut and these members may decide they need financial education – paid by the employer, using the new increased allowance – to help them decide whether they are better off in pensions or a Lifetime ISA.”
Mark Soper, co-founder of RetireEasy.co.uk, worries the Lifetime ISA may impact on an individual's decision to join a workplace pension plan as the ability to save in both may prove difficult to low earners and younger savers alike.
“The allure of the ISA’s early access and possible tax-free withdrawals may lead to many workers withdrawing from or opting out of their workplace pensions with the associated loss of the employer's pension contribution,” he said.
“At best, it provides a layer of complexity for an individual to consider before joining a workplace pension plan - something that is counter intuitive to automatic enrolment. At worst, this could prove disastrous in the longer term for a healthy retirement plan.”
“The new Lifetime ISA appears to be a hugely watered down version of the radical Pension ISA and tax relief reforms that were being talked about before the Budget.”
Adrian Walker, retirement planning expert at Old Mutual Wealth, strongly echoes Soper, saying the news is a crowd pleaser but says pensions are still the best game in town.
“The Lifetime Isa is a gimmick that will only appeal to younger savers looking for help getting on the housing ladder. Very few people will use a Lifetime Isa to save for old-age and pensions are still the best retirement savings vehicle,” he said.
“The £1 bonus for every £4 is parity with the basic rate relief you currently receive on a pension, but crucially without employer contributions. Younger savers will also have to place faith in future governments not to renege on the promise of a bonus at age 60.”
“If government finances deteriorate further, the chancellor may be tempted to extend its reach, allowing government to slash pension tax relief or benefit from income tax on pension contributions upfront. It could be a prototype for the pension system of the future.”
Colin Morton (pictured), manager of Franklin UK Managers’ Focus fund, says the Lifetime ISA could signal the end of pensions as we know them for the under 40s.
“Whilst pensions reform didn’t feature heavily today, clearly the path ahead is being set for an ISA-based system, as younger savers are encouraged to invest into a new Lifetime ISA. Today could mark a very important first step in the end of pensions for the next generation.”
