Industry Voice: Scottish Widows' Ian Naismith discusses the new Lifetime ISA

clock • 4 min read

The pensions content in this year's Budget was notable for an unscripted announcement and a scripted non-announcement.

The unscripted announcement came in a dig at the former Liberal Democrat Pensions Minister. The Chancellor suggested Steve Webb had said the Government would abolish the tax-free lump sum, but instead, said George Osborne, he would keep the lump sum and abolish the Liberal Democrats. Steve Webb actually meant, correctly, that the 25% tax-free lump sum would disappear for future contributions in a pension ISA system where all proceeds were tax-free, but the Chancellor's statement should reassure many IFAs and clients who worry that the lump sum could be removed retrospectively. George Osborne will not announce such a deeply unpopular measure that would do very little in the short term to reduce the deficit.

The non-announcement was whether the Government intends to keep the current system long-term. The Chancellor said there had been no consensus in the consultation, and went straight into his Liberal Democrat joke, which may have been a good diversionary tactic. Nowhere in the speech he delivered, the published version or the Budget Red Book does it say a decision has been made. The published summary of responses also, unusually, presents no Government views on the comments it received. The way has been left open for possible radical change at an opportune time, perhaps in the not-too-distant future.

The big positive savings announcement was the Lifetime ISA. We should warmly welcome that. The incentive is generous and the deterrents to cashing in unwisely should prove effective. Scottish Widows research last year found that 44% of consumers in their 30s make some of their retirement savings outside a pension, and the average saver puts aside £150 a month on top of any pension contributions. That is a large group of potential beneficiaries. The measure is also particularly advantageous for self-employed basic-rate taxpayers who are poorly served by the pension system and will now get the equivalent of full tax relief without any of the proceeds being taxable.

Concerns about the impact on automatic enrolment have been exaggerated. Those whose priority is to get on the housing ladder will already place Help to Buy ISA and other savings vehicles above pension, while those who intend to make other withdrawals face ending up with a net 5% tax loss so would not sensibly invest in a Lifetime ISA. If some feel that pension should wait until they build up their house deposit that is their decision, as long as the consequences are made clear.

As an industry we need to explain clearly the benefits of automatic enrolment pensions, including the value of employer contributions and the possibility of salary exchange if appropriate. But we must be very cautious about suggesting that owning a pension is more important than owning your home.

The Lifetime ISA adds complexity to savings decisions, and it is vital that the Financial Advice & Markets Review is delivered effectively. As a long-term plan the formation of two bodies, with one providing pensions guidance and the other overseeing money guidance, makes sense, but it will be important not to lose what is good in the current bodies. This includes the very broad range of educational financial material on the Money Advice Service website and the army of volunteer industry veterans who help with dispute resolution through The Pensions Advisory Service.

The commitment to getting the pensions dashboard in place by 2019 is welcome, because this is a step that will really benefit consumers. It is important, though, that both the practicalities and cost of development are spread among all pension schemes, and that all pensions including state ones are included from the start. This can be achieved effectively if a central body coordinates and hosts the hub, and the new pensions guidance service is an obvious candidate. That has the added advantage that there are already plans for that to be funded by a levy of all pension schemes, so adding in the cost of the dashboard will not require a new levy.

It is good that the Government is continuing to look at the effectiveness of the freedom and choice regime, and the few new measures look worthwhile. By this time next year there may be more evidence for a fuller review.
Is this a good budget for the pensions industry? Well, changes always bring opportunities and challenges, and this year's ones are less seismic than in previous Budgets. George Osborne has given us a little breathing space from radical reforms. Enjoy it while it lasts.

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