Lifetime ISA may foreshadow end of pensions tax relief

Thursday, 17 March 2016

Yesterday's Budget introduced the 'lifetime' individual savings account (ISA/LISA), a new type of tax-free savings account.

Individuals will be allowed to contribute up to GBP4,000 per year out of their after-tax income. The government will add an extra 25 per cent, equivalent to tax relief at 20 per cent, until the account holder reaches 50. After the age of 60 the account holder can extract the proceeds tax-free, or before that age use them towards a deposit on a first home.

Savers will be allowed to make withdrawals at any time for other purposes, but will then have to repay the 25 per cent top-up plus any interest or growth on it as well as a five per cent penalty.

HM Treasury will liaise with the financial industry to explore the possibility of savers being able to borrow from their savings without losing the bonus provided the loan is repaid in full, said the Institute for Chartered Accountants in England and Wales (ICAEW). Consideration will also be given to allowing early withdrawal without loss of the bonus in specific lifetime events.

These 'LISA' accounts will be available in April 2017, though limited to people in the 18-40 age group. Contributions to a LISA will sit within the overall ISA contribution limit, which will increase from GBP15,240 to GBP20,000 in April 2017 (it is unchanged this year). People will also have the option to roll their existing Help To Buy ISAs into the scheme.

LISA accounts will be treated like existing ISAs for inheritance tax purposes, with the funds forming part of the estate. The deceased's spouse or civil partner inherits the ISA tax advantages and will be able to invest as much into their own ISA as their deceased spouse as well as their own allowance.

Starting a LISA account does not affect the pension allowances and registered pension regime already in place. The idea clearly bears a strong resemblance to the traditional pension, with the exception that contributions are capped and tax relief (or its equivalent, the government-contributed bonus) is fixed at 20 per cent. It is very similar to one of the ideas floated in a Treasury consultation paper last summer as an alternative to the pension tax relief system.

This has prompted suggestions that the government is preparing the eventual abolition of traditional pension tax relief. 'One might wonder whether this is softening the public before the removal of the more generous reliefs on pensions in due course', commented Lucy Brennan of tax advisors Saffery Champness. 'The Chancellor may have stepped back from his original plans for a fully fledged Pensions ISA, but it does seem that the new Lifetime ISA is definitely leaning towards a PISA', commented Jackie Hall TEP of RSM UK. 'I expect to see this rolled out to cover all pensions savings', said Rachel de Souza of RBC Wealth Management. 'Watch out for a cut in higher rates of relief on pension contributions in the future.'

  • The Finance Bill 2016 will be published on Thursday 24 March.

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