Chancellor George Osborne has today introduced a new ‘Lifetime ISA’ for young savers, threatening the future of traditional pension saving.
Delivering his Budget speech today, Osborne said from April 2017, anyone under 40 will be able to open a Lifetime ISA, meaning for every £4,000 saved the government will add £1,000 every year until the age of 50.
The Chancellor said he wants to help the next generation build up assets and save, as many do not have pensions because they are "too complex”.
"Most young people face an agonising choice of either saving to buy a home or saving for their retirement, we can help by providing more information about the multiple pensions people have and providing more tax relief on financial advice.
“Over the past year we have consulted widely on whether we should make compulsory changes to the pension tax system but it was clear there was no consensus, indeed the former pensions minister Steve Webb said I was trying to abolish the lump sum, instead we’re going to keep the lump sum and abolish the liberal democrats.
“My pension reforms have always been about giving people more freedom and more choice so faced with the truth that young people aren’t saving enough I am today providing a different answer to the same problem," he stated.
Osborne said he knows people like ISAs because they are simple, which is why he is increasing the annual allowance from just over £15,000 to £20,000. In addition, for those under 40, he will introduce a Lifetime ISA for those who have not had a "good deal from the pensions system".
"You don’t have to choose between saving for your first home or saving for your retirement, with the new Lifetime ISA, the government is giving you money to do both.
"For the basic rate taxpayer that is the equivalent of tax free savings into a pension and unlike a pension you won’t pay tax when you come to take the money out in retirement. For the self-employed it’s the kind of support you simply cannot get from the pension system today," he explained.
Those who open a Lifetime ISA will be able to access their money at any time for a small charge and the government is also going to consult with the industry on whether people can return their money to the account to reclaim the bonus, like the American 401K.
"Those who have already taken out our enormously popular help to buy ISAs will be able to roll it into the new lifetime ISA and keep the government match," he said.
Osborne has also pledged to rise public sector pension contributions as part of the Budget, while concerns for the future of salary sacrifice schemes still remain.
The Chancellor said the government wants to keep public sector pensions sustainable, adding “to ensure pensions remain sustainable, public sector employer contributions will rise”.
However, he stressed that this wouldn’t affect the pay out of anyone’s pensions.
Osborne claimed the last reforms made to public sector pension schemes will save the government over £400bn in the long term.
Commenting on Twitter, former pensions minister Steve Webb said: “Public sector employers will have to increase contributions because of lower discount rate assumption.”
The Chancellor also hinted at targeting the £12bn in tax avoidance from “disguised remuneration schemes”, which the industry has since claimed could include salary sacrifice schemes.
At present, it costs basic rate taxpayers £68 to save £100 into their pension, £58 for higher rate taxpayers and £53 for additional ratepayers.
However, the abolition of salary sacrifice means basic rate taxpayers would need to increase their contributions to £80 to save £100, while for higher and additional rate taxpayers this would only increase to £60 and £55.