A Lifetime ISA: Is this the end of pensions?

Written by Lauren Weymouth

Chancellor George Osborne has today announced the introduction of a new ‘Lifetime ISA’, but what seems like a “shiny new product”, has been greeted with mixed reviews from industry figures as many try to understand what kind of effect it could have on the traditional pension.

Osborne specified anyone under the age of 40 will be able to open a 'Lifetime ISA' and every £4,000 saved will be topped up with £1,000 by the government 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”.

However, former pensions minister and Royal London director of policy Steve Webb said the new product is causing “mass confusion”.

“The Chancellor's desire for a shiny new initiative could undermine the huge progress which has just been made in ensuring young workers have savings for retirement,” Webb said.

“Young savers who opt out of pensions in favour of a lifetime ISA lose the contribution from their employer and the chance to build a tax-free lump sum from a pension pot - how will they know which is right for them?” Webb said.

Many figures have also pointed out that the Chancellor has managed to subtly introduce a ‘Pensions ISA’ – which was among the early predictions for today’s announcements – without making it compulsory.

"The Lifetime ISA appears to have echoes of George Osbourne's alleged original plan to introduce the Pensions ISA, which in my view would have had injurious effects for the pensions system as a whole,” Barnett Waddingham senior consultant Malcom McLean said.

“As this new arrangement sits on top of and doesn't fully replace the current pension system, those dangers are to some extent ameliorated but as indicated the long-term consequences have yet to be determined. The success or otherwise of the package as a whole will only become clear over time."

Pinsent Masons pensions expert Simon Laight agreed, stating: “Chancellor George Osborne has cleverly sidestepped the backlash over proposed reforms of the tax incentive to save.

“Rather than compulsorily making the change to a Tax Exempt Exempt (TEE) system, he has made it voluntary. The target consumers will shy away from the standard Exempt Exempt Tax (EET) tax system for pension savings and instead favour the lifetime ISA.

“Less money going into EET means lowering the Chancellor’s yearly tax relief spend i.e. it brings forward tax receipts. He has brought in limited TEE via the back door.”

However, Pensions and Lifetime Savings Association chief executive Joanne Segars praised the Chancellor’s decision not to make any changes to pension tax relief as “the right one”

“We are pleased the Chancellor has listened and recognised that huge changes to pension tax relief will not act as an incentive to save.

Segars added that the introduction of a Lifetime ISA is an “interesting initiative” to help younger people add to their pension and lifetime savings.

“We look forward to working with the government to help make sure that the Lifetime ISA does help younger people build up their savings.

“An important part of this will be to make sure that savers’ interests are protected by ensuring that the regulation on charges and governance of the Lifetime ISA are comparable to those for pensions, which have been reviewed to make sure they offer savers good value.”

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