One of the Chancellor’s ‘rabbits from his hat’ in this year’s Budget was the Lifetime ISA. Will it serve to “strengthen the incentive to save” amongst the young, and how might it interact over the longer term with SIPPs and pensions in general? Here, James Jones-Tinsley upturns his goldfish bowl, and attempts to gaze into the future...
My wife is called Lisa, and you can imagine how overjoyed she was (not!) when I informed her that her name was now synonymous with the newest ‘savings kid on the block’ - the Lifetime ISA or 'LISA'.
And, despite it only being a short time since its launch in this year’s Budget, I have already lost count of the number of articles and blogs that have been written about the LISA; despite there currently being only six sides of A4 available about it from HM Treasury (Lifetime ISA / The new Lifetime ISA Technical Note).
Rather than merely regurgitating what we already know about the LISA, this blog aims to look to the long-term future of saving, and ask whether a ‘sweet spot’ may arise (and, importantly, be permitted by legislation), where it makes tax-efficient sense for monies accumulated within a LISA to be wholly or partly transferred into, for example, a SIPP?
Phew! What a relief!
The consultation paper launched by HM Treasury immediately after the summer budget in July 2015 was entitled, Strengthening the incentive to save: a consultation on pensions tax relief.
"Is the LISA merely the start of a gradual evolution towards a Pension ISA?"
The overwhelming response to it, from within the pensions industry and beyond, meant that the Treasury response was delayed from last November’s autumn statement until this March’s budget.
One suspects another reason for the delay was because the responses were not saying what the Treasury wanted to read. How could billions of pounds be shaved off their pensions tax relief bill, when the overarching view was, “it ain’t broke – so don’t fix it!”?
Their postponement also exacerbated an air of expectation that changes would be announced in the budget, and the two ‘front runners’ became one rate of tax relief for everyone, and the much-feared Pension ISA.
In the end, a pre-budget media briefing suggested that no changes to pensions tax relief would be made, and this did, indeed, come to pass as the Chancellor delivered his speech.
The only relief prevailing that day was the audible sigh of relief from within the industry.
A wolf in sheep’s clothing?
Is the LISA merely the start of a gradual evolution towards a Pension ISA? The undoubted success of the Help-To-Buy ISA since its launch last December has demonstrated to Osborne the popularity – particularly amongst the younger members of society – of a governmental ‘top-up’ as a reward for saving; a tangible demonstration of “strengthening the incentive to save”.
"Could a point be reached within a person’s lifetime where it would make sense, for reasons of tax-efficiency, to transfer some or their entire LISA fund into, for example, a SIPP?"
And it is this concept that underpins the LISA; an (arguably age-discriminatory) tax-efficient savings vehicle, unashamedly designed to appeal to the young, with an equivalent tax relief of 20% on the maximum annual savings amount of £4,000 (up to age 50), and the promise of something that cannot normally be offered by a pension - namely, early access to the fund before age 55.
Initially, this access will solely be to help with the purchase of a first house, although HM Treasury has left its door ajar to consider other ‘life events’; for example, marriage and first-born children.
But if the LISA-holder decides – or doesn’t need – to access their fund during their formative years, the other option is to leave the monies invested until at least age 60, where they can then access the whole fund for their retirement. And because it is an ISA, current tax rules mean that the whole amount can be taken tax-free.
All of these features appear – at face value – far more attractive than saving into a pension, and much ‘wringing of hands’ is now taking place about how the LISA will impact on auto-enrolment opt-out rates.
The long view
But – taking a long-term view – could a point be reached within a person’s lifetime where it would make sense, for reasons of tax-efficiency, to transfer some or their entire LISA fund into, for example, a SIPP?
The proposed penalties for accessing a LISA fund prior to age 60 are potentially punitive, whereas access to the fund at an earlier age, via a pension wrapper, could be achieved without penalty.
I agree that, under current rules, 75% of the pension fund would be subject to income tax, but consider the difference between the two vehicles from an estate planning standpoint.
On death, an ISA fund would form part of the deceased’s estate for inheritance tax (IHT) purposes, whereas if held within a trust-based pension like a SIPP or SSAS, could be distributed to survivors without attracting IHT. And the generous changes to the taxation regime for pension death benefits from April 2015 have liberated both the distributive range and tax-efficient nature of those payments; particularly where death occurs under age 75.
Best of both?
In a perfect world, concurrent saving within both a pension and a LISA would offer savers ‘the best of both worlds’, and legislation may never be passed to permit a LISA-to-SIPP transfer.
But if Osborne is genuinely committed to strengthening the incentive to save over the long-term, and not just looking at ways to balance the books before the next General Election, no element of ‘blue-sky thinking’ should be left off the Treasury’s table; particularly where the freedom to transfer funds from an ISA to a pension are concerned.
Blog first published on SIPPs Professional website