Lifetime ISA and pensions

In July 2015, the Government launched a consultation on reforming pension tax relief with the aim of strengthening the incentive to save. In his Budget 2016 speech, the then Chancellor of the Exchequer, George Osborne, announced no compulsory changes to the pension tax system, saying it was “clear that there was no consensus.” However, the Government would introduce measures to encourage saving through:

• an increase in the annual amount an individual can save in an ISA from £15,240 to £20,000;
• a new Lifetime ISA (LISA), which could be opened by people aged between 18 and 40 from April 2017. Individuals would be able to save up to £4,000 each year and receive a government bonus of 25%. The money could be used to buy a first home worth up to £450,000 or withdrawn after age 60. Funds withdrawn for other purposes would attract a 5% charge and lose the government bonus;
• new Help-to-Save accounts for people in receipt of Universal Credit with minimum weekly household earnings equivalent to 16 hours at the National Living Wage, or those in receipt of Working Tax Credit. This would work by providing a government bonus on up to £50 of monthly savings. The bonus would be paid after two years, with an option to save for a further two years. There would be no restrictions on how the funds were used. (HC Deb 16 March 2016 c966; HM Treasury, Budget 2016, HC 901, March 2016, para 1.108-12)

HM Treasury provided further details in a Lifetime ISA factsheet and design note.

While there has been a general welcome for new measures to encourage and support saving, concerns have been raised about the potential for the LISA to undermine auto-enrolment. Questions include:

• How savers would be supported to make the right decision on where to save. In particular, there is concern that some employees might decision to save in a LISA as an alternative to a workplace pension, losing out on the employer contribution;
• Whether the interests of LISA savers will be protected with regulation on charges and governance comparable to pensions;
• How to ensure people saving for retirement in a LISA have an appropriate investment strategy;
• The overall impact on retirement savings.

The Savings (Government Contributions) Bill was published on 6 September 2016 and had its Second Reading on 17 October 2016.The Library Briefing Paper for Second Reading debate is CBP-7697. Details of the progress of the Bill can be found on the Parliament website and in CBP-07748 Savings (Government Contributions) Bill – debates in Parliament (November 2016).