In recent years, younger generations have grown increasingly discontented with the way in which they make pensions contributions. In an ideal world, everyone would be able to afford to pay into a pension pot every year and only have a need to access this money when they retire, whenever that may be. However, the reality is that a great deal of people would rather use some of the money they save every year towards buying their first home as opposed to moving to a Caribbean island when they turn 55 (although hopefully, both would be on the cards!)
In an attempt to modernise the way in which we save money, in the 2016 Budget, George Osborne announced plans to introduce the lifetime ISA (LISA). Under this scheme, people under the age of 40 will be able to open a LISA and contribute up to £4,000 each tax year. The government will top up the person’s contribution by 25% at the end of each tax year. An individual who has a LISA can therefore save up to £5,000 a year which can then be withdrawn under certain circumstances.
Although this proposal has been welcomed with open arms by many (but not yet all), there were fears that the government would over-complicate the ways in which withdrawals can be made which would have the effect of making LISAs inaccessible in practice. Thankfully, the Savings (Government Contributions) Bill was introduced to the House of Commons on 6 September 2016 and has paved the way for a clear and simple approach to LISAs, although the bill is still vague on a few details. This will need to be addressed before the new LISA regime can be open to business.
Under the bill, some or all of the money saved in a LISA can only be withdrawn in one of the following three circumstances:
- to buy your first home (worth up to £450,000);
- to fund retirement after the age of 60; or
- if you contract a terminal illness or die.
However, if withdrawals are made in other circumstances, a fee of 5% is charged and the government’s 25% top up must be returned. Some providers are demanding that the government review these extra fees as they seem too harsh and are warning they won’t commit to providing the product until the fees are reduced.
The question will now turn to how long it will take employers to plan and implement LISA schemes. Although the bill is intended to take effect on 1 April 2017, it is unlikely that employers will be able to make the necessary changes to their existing remuneration policies in this timeframe and alter workers’ contracts of employment to the extent necessary. It also remains to be seen how LISA schemes will interact with employers’ auto-enrolment rules and the proposed changes to salary sacrifice arrangements. However, despite these uncertainties, the demand for these schemes is set to be significant.
Please contact a member of the team if you would like advice on reviewing your current remuneration arrangements and advice about how to implement change.
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