From Ros Altmann:economist and pensions,
    investment and retirement policy expert

  • pensionsandsavings.com

    Pensions are far better than Lifetime ISAs – Treasury Committee is right to recommend abolition

    Pensions are far better than Lifetime ISAs – Treasury Committee is right to recommend abolition

    • Treasury Select Committee is right to recommend abolition of Lifetime ISA.
    • Also right to suggest abolition of pensions Lifetime Allowance.
    • Just have limit on annual contributions without penalising investment success.

    Lifetime ISA is unhelpful and confusing: I welcome the Treasury Select Committee’s recommendation to abolish the Lifetime ISA (LISA). (link here: https://publications.parliament.uk/pa/cm201719/cmselect/cmtreasy/565/56510.htm ) The LISA is a hybrid product that can be used to save for house purchase or for later life. These two aims should be kept separate, rather than trying to complicate the choices on offer. Indeed, ISAs were supposed to be a ‘simple’ savings product, but changes over time have confused the landscape. We now have seven types of ISA – one for every day of the week!

    Lifetime ISA has complex rules: LISAs are available to people aged 18-40 who can save up to £4000 a year, and no more can be put in after age 50. The Government adds a 25% bonus (which is the same amount as would be added by basic rate tax relief). The LISA can be used to buy a first home, or withdrawn, tax-free, at 60, but taking money out for any other reason earlier than this, entails a draconian penalty. Not only do they have to repay the Government bonus, they will have to pay around a 6% penalty too.

    LISA has huge mis-selling risks as rules and penalties require risk warnings and suitability checks: LISA rules, restrictions and penalties make it a complex product which is not safe to sell without advice. LISAs need proper risk warnings and suitability checks, but they do not have such safeguards, meaning there are clear dangers of mis-selling or mis-buying. Those paying in need to understand the penalties, and pension disadvantages they may lose out on.

    Workers would usually be worse off with a LISA: If employees opt out of their employer’s pension scheme in order to save in a LISA, they are likely to lose out. They will usually be giving up an employer pension contribution, may lose higher rate tax relief and possibly lose National Insurance relief too. This would make them worse off in retirement than if they had put their money into a pension.

    LISA could undermine auto-enrolment success: Auto-enrolment is bringing millions more people into pension saving, and opt out rates are low – a real success story. Confusing the landscape with an alternative, potentially inferior product, could undermine future retirement security. LISAs, for example, are more likely to be saved in cash giving lower long-term returns, and charges may be higher than pensions (which are subject to controls). The LISA is tax-free from age 60, making it more likely that people will take out the entire LISA when relatively young, rather than keeping it for much later life. The point of retirement saving is surely to help future pensioners have money in their 80s, not just in their 60s.

    Pensions are more likely to last a lifetime than Lifetime ISAs: LISA behavioural incentives are perverse if used for retirement saving. Pensions have sensible behavioural nudges, with automatic enrolment, employer contributions and tax rules designed to encourage people not to spend the money too quickly. Since pension freedoms, pensions can safely be kept for much later life and passed on tax-free if unspent. Today’s taxpayer subsidy for LISAs might be wasted if the money is spent too soon, leaving more pensioners in poverty for future taxpayers to support.

    LISA could help first time buyers, but should be kept separate from pensions: Those saving to buy their first home can benefit a LISA, but there is already a Help To Buy ISA for that purpose. Why confuse the ISA brand with yet another product – it is better to keep this simple and separate.

    Lifetime ISA will be great for wealthy people – but do they need further taxpayer subsidy?: LISAs offer anyone who has paid their full £40,000 annual allowance, or reached their Lifetime Allowance, or already paid maximum contributions into a spouse or grandchildren’s pensions, extra taxpayer subsidy. Many IFAs will advise wealthy clients to take advantage of this as another tax-incentivised savings vehicle for themselves, or their family. But is this a sensible use of taxpayer resources?

    Abolition of Lifetime Limit in favour of one Annual Limit is sensible: The Treasury Select Committee Report also recommends that the pensions Lifetime Limit should be abolished, in favour of a simple Annual Limit for everyone. This makes much more sense. The Lifetime Limit (recently reduced to £1million) penalises good investment performance and hampers proper pension planning. It does not make sense to limit both the amount contributed and the amount accrued. The aim of long-term pension investments is to try to benefit over time from good investment opportunities to improve retirement outcomes. If there is a penalty for performing too well, then the aim of maximising long-term returns is jeopardised. A simple annual limit makes much more sense.

    Those who most need retirement savings will normally be better off using pensions: Just as auto-enrolment is taking off, it is so important to support and promote pensions as best we can. The Treasury Committee’s recommendation to get rid of LISAs is right. Let’s just have a separate fund for house purchase.

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