Pensions on trial
George Osborne’s announcement of the Lifetime ISA where anyone under the age of 40 will be able to save up to £4,000 per annum plus £1,000 contribution from the Government until the age of 50 has cleverly kept the issue of whether or not the traditional pensions model will continue to exist.
Pre-budget speculation as to whether pensions (taxed on payment of the pension) would be replaced by an ISA taxed on contributions into the ISA was shelved at the last minute amid fears of negative impact on the Brexit vote. However, yesterday’s announcement cleverly side steps and left all options open. The consequence of the new Lifetime ISAs in 2017 could mean the Chancellor has the ability to test, on an ongoing basis, the popularity of the Lifetime ISA model against pensions. Alternatively, if he is committed to scrapping the current pensions tax system, he already has a vehicle in place with which to replace pensions. However, the slightly added attraction of being able to use the account to buy a first home worth up to £450,000 (a la the French model) or to drawdown in retirement, and having the flexibility to allow withdrawals at any time for other purposes (subject to the removal of any Government bonus plus any interest on growth and a 5% charge for doing so) is questionable whether or not the Lifetime ISA in its current form will actually do anything to encourage further saving for old age. The key question for many employers and their employees will be how the Lifetime ISA will be integrated into part of any employee/employer saving arrangement, i.e. will employers obtain tax relief towards contributing to Lifetime ISAs in the future, thereby making them more attractive as an alternative to the traditional pensions model. It could be this course is voluntary rather than compulsory that is ultimately the way the pension system is changed.
Salary sacrifice scrutinised
Hidden away in the notes accompanying the budget, HMRC has confirmed what many had speculated about pre-budget that it is to carry out further in depth investigation into the use of salary sacrifice arrangements. Salary sacrifice arrangements have rushed in since 2010 driven especially by use around auto enrolment. HMRC’s initial notes suggest that salary sacrifice use in relation to pensions is not a particular area of concern, however, HMRC is concerned that many other types of employee benefits are now being placed inside salary sacrifice schemes. Employers contemplating the introduction of schemes for anything other than pensions such as childcare and health related benefits such as cycle to work, may want to pause before their introduction and see what is happening with HMRC’s review.
It pays to keep your employees informed
In addition to pressing forward with the idea of a Pensions Dashboard where individuals can see all of their pension savings from all sources on one screen, the Government has also introduced a number of initiatives on the provision of pensions advice. In particular, they are looking to introduce a Pensions Advice Allowance that will allow people before the age of 55 to withdraw up to £500 tax free from any money purchase arrangement to redeem against the cost of financial advice. The exact age at which people can do this will be determined through consultation.
For employers there is an increase in the tax relief they would get from the current £150 per employee to £500 per employee.