The Lifetime Isa is both a powerful tool for attracting younger employees and a significant challenge to existing pension offerings. JOHN LAPPIN sees interest and unease in equal measure in the Chancellor’s new model
Muddying the waters midway through the rollout of auto-enrolment, next April’s launch of the Lifetime Isa is an attractive government incentive for under-40s to save for a home purchase or help to fund their retirement, with complex restrictions and penalties for early access. Pension professionals are seriously concerned that its launch could lead to employees opting out of their workplace pensions.
Debating the issue last month at a Corporate Adviser/Royal London roundtable event on the Lifetime Isa, pensions and the auto-enrolment secondary market, Aon head of auto-enrolment Clare Abrahams pointed out that as it stands, the Lifetime Isa is a long way from being anything like a well-governed long-term savings vehicle. She said: “Key to the discussion around AE is that it is not a qualifying pension scheme – for very good reasons. There is no regulation around it, no charge caps and no investment defaults.”
Jelf head of benefits strategy Steve Herbert said the Lifetime Isa does not yet affect the AE market, but it should make a difference to employee benefits generally because it should sit alongside other workplace savings on benefits platforms.
“Until the legislation changes, people are going to be auto-enrolled in pensions, rightly or wrongly,” he said. But he added that it was a bizarre decision to introduce the Lifetime Isa before AE is fully rolled out.
Royal London business development manager Jamie Clark predicted that the Lifetime Isa could prove attractive to those who already have money, who will pay into one for their adult children and even want to use it for themselves if they are young enough and have exhausted other allowances.
A number of delegates thought the Lifetime Isa was far from a coherent product in its own right. It is costing the Chancellor money – £2bn by the end of this Parliament – and is a stopgap solution, some suggested. It may also be a Trojan horse for a full ‘pension Isa’ system.
Abrahams said: “There is a lot to define about where the Lifetime Isa sits, but the Chancellor is likely to use that to get a new system through the back door. That is what he wants to do: moving everything to a new tax system.”
Herbert added: “He has introduced a competitor to pensions without changing the pension system, which is actually quite clever.”
Secondsight partner Darren Laverty felt the Brexit vote may have been instrumental in preventing Osborne from going all the way to a pension Isa, dropping the basic principle of pension contributions being paid out of untaxed earnings, in this year’s Budget. But Laverty questioned whether momentum for change may have been lost, given the setback already experienced. He said: “[Osborne] is clearly committed to what he wants to do. He just cannot do it at this time. But the Parliamentary term could be too short for him to implement it.”
Herbert noted that an incentive structure, rather than a relief one, seems to be the way the Treasury is going. He pointed out that the 25 per cent incentive, which works out the same as 20 per cent tax relief, mirrors the approach being adopted on childcare vouchers, which are also being turned from reliefs to incentives.
But delegates reflected on a host of other political issues that have to be taken into consideration – most notable of all being the political fallout of a poor showing for the In campaign in the EU membership referendum on 23 June. Should that vote lead to a challenge to the Prime Minister’s position, a Boris Johnson premiership would very likely mean a new Chancellor, who may not be prepared to take the political flak of moving from a pension tax relief to a pension Isa model.
But there was a general perception that the government would move to reduce the expense of pension reliefs in some way, regardless of who was in charge, so higher rate taxpayers should expect significant reductions in the tax advantages they currently enjoy.
Abrahams said: “It is going to be disguised as something else. I think it will be something like ‘we are getting rid of NI’ or merging the systems. The definition of how the Lifetime Isa will work will need to be ironed out and they may sneak something in with that.”
Laverty suggested the Lifetime Isa would run alongside the pensions system, with employers looking at providing both options to allow people to pick and choose, although it was noted that this still meant the Chancellor would be spending £35bn in tax relief costs as long as pensions continue to exist.
Johnson Fleming senior consultant Robert Kingston said: “We talk about levelling the playing field. But where does DB sit in this? A massive proportion of the tax relief is in DB. We are talking about tinkering at the edges when we talk about AE. That is not costing a fortune in tax. The real tax implications in the UK are defined benefit.”
Yet it was also suggested that a wider DB reform could fall into the ‘too difficult’ box, particularly given public sector pensions. Herbert argued that the movement involves AE DC pensions because final salary is too difficult. It was noted that full AE contributions and minimum wage could eventually add up to substantial sums, making the cost of tax relief considerably higher if no big changes are made.
Yet the panellists questioned the rationale behind the strategy and expressed concern over the ease with which money could be withdrawn from the Lifetime Isa. If a future pension Isa were to take the same form as the Lifetime Isa, withdrawals would be a serious issue and individuals could find themselves approaching retirement having only recently started saving.
Abrahams said: “If you take a step back, the whole point of offering tax relief in the first place is to encourage people to save. The Chancellor is moving away from that sort of argument and it is going to cause all sorts of problems down the line.”
LEBC consultant Chris Brown said: “If you give people to ability to draw money out during their working lives, it will never be replaced.” It was also noted by Abrahams that there was no guarantee it would not be taxed at the end, whatever system of reliefs the money attracted at the start.
Herbert suggested that ‘the clever bit’ with the Lifetime Isa is not about the form of tax incentive, but tagging it on to house purchase, which would make the policy immediately attractive to millennials.
Laverty raised the issue of inducement rules, whereby employers might be accused of encouraging workers to opt out of auto-enrolment and into a Lifetime Isa, if the employer set one up as a potential competitor through a workplace benefits proposition. Abrahams thought this would only be a real risk if the employer agreed to switch their contribution into the Lifetime Isa as well.
The panel also suggested the age limit of under 40 for the Lifetime Isa was to avoid higher earners using it as an alternative to the clampdown on pensions, although it was also pointed out that it could relate to the theme of intergenerational unfairness that had emerged in the Chancellor’s Budget speech on several occasions.
The discussion over whether the Lifetime Isa was a stepping stone towards a pension Isa replacement for pensions tax relief concluded with delegates pointing out how controversial and difficult such a transition would have been, and whether it might have led to a u-turn had it been tried, as has happened on disability benefit reform.
Abrahams said employers do not want to be seen to endorse an Isa provider in the workplace, while Clark noted that the current distribution model for Isas is very different from that of workplace pensions. “It is seen very much as a consumer product,” explained Clark.Abrahams was worried about the investment strategies people might choose. “Is it long term, or medium term, or even short term?” she asked.
Advisers were divided over the extent to which they had seen employer interest in the new product, although this difference may be down to the fact that regulations around the product, let alone product development, are still almost nonexistent.
Brown said: “I don’t think employers are showing any interest at the moment in Lifetime Isas, other than those who have hit the new annual allowance ceiling and who have not been advised to do Isas in the past.”
Herbert has seen mid-sized employers who are interested in building the Lifetime Isa into a benefits strategy because of its appeal to younger people and millennials.
Laverty added: “I have spoken to three employers and they all want payroll deducted corporate Isas or Lifetime Isas for their under-40-year-olds. It is a no-brainer. If you are going to get 20 per cent tax relief for under 40s and they can access it for other things, it is an interesting move and a nudge to get us used to the whole concept.”
Abrahams agreed, saying: “The access is there to engage young people, where the word ‘pension’ doesn’t go down well.” Yet she raised the issue again of people using the money to buy a house and then having no money for retirement.
Herbert also questioned the status of the Lifetime Isa. He said that while on the face of it, the product is “exempt, exempt, exempt”, in reality access is restricted. The panel agreed with him. Herbert noted that you could lose the tax relief, the investment return associated with it and face a 5 per cent penalty for accessing the Lifetime Isa in your 50s.
Clark also raised a thorny question: at what point do employees need advice on whether to take up the Lifetime Isa, and who would distribute that advice?
Abrahams said employers do not see it as their responsibility, and Brown added that their lawyers will tell them to stay away from it. Herbert suggested financial education would be the winner.
Laverty agreed, saying: “We educate like crazy. It leads to different levels of advice. One of the things that made a massive change was to have adviser charging on a pension scheme – having that facility for ad hoc, initial or ongoing. We have given lots of individual advice and 80 per cent of clients go for adviser charging. It lets us give more advice to more people and it is filling the advice gap.
“We can promote advice to employees. The employers pay for the financial education, we have to work out the cost of various levels of advice, and you have adviser charging as an option.”
Then comes the equally complex issue of who would source the Lifetime Isa to be distributed through the workplace. That, delegates agreed, would come down to the EBC or corporate IFA.
Brown said: “The employer doesn’t want to take responsibility, so if they can pass it on to someone who knows what they are doing, why wouldn’t they?”
