Potential pitfalls of the Lifetime Isa – Royal London
By Kirsten Hastings, 14 Jun 16
To be introduced in the UK in April 2017, the Lifetime Isa (Lisa) is intended to incentivise people to save for their first home, their retirement, or both. But research published by the independent Pensions Policy Institute (PPI), sponsored by Royal London, compares the tax-free savings scheme with its international counterparts and highlights some challenges that may arise.
Implications for the UK – Part 2
There may be reduced incentive to withdraw retirement income in a phased way;
- Schemes in the US that allow early access also require minimum withdrawals after a certain age. These schemes are also EET, meaning that people are incentivised to withdraw a minimum level of income without withdrawing so much that they enter a higher tax bracket.
- Canada’s system is also EET, incentivising pension members not to withdraw beyond their marginal tax allowance, while New Zealand, which allows early access alongside a TTE scheme, has traditionally had less concern about the use of private pension funds in retirement due to the more generous state pension.
- Because UK private pension savings are EET, there is an incentive to withdraw retirement savings in a phased way that provides for needs in retirement without incurring excess tax charges.
- Lisa savings, however, are TEE, and therefore people who make retirement savings using a Lisa may withdraw large lump sums from their savings in early retirement, depleting savings earlier than if they were withdrawing from private pension savings.
Lisa savers might not have the same options for income conversion in retirement;
- Those who use pension saving products with early access internationally have access to products designed to help convert savings into a pension income. In the UK, there are drawdown and annuity products, designed to work within the pensions tax system and help people to provide themselves with an ongoing income stream with which to support retirement.
- Lisa savers are unlikely to want to use these products as they are designed for EET savings and income from these products is taxed. Lisa savers may receive less support in choosing an appropriate income product as there is likely to be less free advice and guidance on offer than for those retiring with private pension savings unless the system evolves to provide more support.
Lisa savers might not be protected by the same regulation regime as those saving in a workplace pension;
- Private pension schemes in the UK are regulated by a combination of The Pensions Regulator (TPR) and the Financial Conduct Authority (FCA). With the advent of auto enrolment, regulatory reforms have been introduced with the aim of protecting the interests of savers in private pension schemes.
- Notable among these reforms are the charge cap on default funds in automatic enrolment qualifying schemes of 0.75% (excluding transaction costs). Providers of contract-based schemes are also now required to answer to independent governance committees, whose role is to ensure schemes provide value for money to members.
- The government also provides free pensions guidance for those approaching retirement with defined contribution pension savings, which may not be offered to those approaching retirement with Lisa savings. Other countries combine early access with recognised private pension schemes, subject to the pension regulatory regime.
- People who save in a Lisa will most likely have their providers regulated by the FCA alongside other users of non-pension financial products, and would not have their scheme regulated by The Pensions Regulator through their employer and automatic enrolment regulations. They are unlikely to benefit from the special measures which have been put into place in order to protect those saving in private pension schemes. This could have a particular impact in the area of charges, with higher charges able to erode the value of a pot over time.
Tags: Australia | Canada | New Zealand | Pension | Royal London | Singapore | Steve Webb | US
