A Budget for Savers?
by Brian Morris, Head of Savings Policy
A couple of weeks before his recent Budget, Chancellor George Osborne acted to quell growing speculation about changes to the pensions regime by announcing that he would not be replacing the existing approach to taxation of retirement savings with a pensions ISA.
He then surprised us all by announcing a new account, the Lifetime ISA (LISA), which looks very much like…… a pensions ISA! To be fair, the LISA does have another purpose - to fund first time house purchase. Also, it is to be limited in scope, i.e. to those aged under 40, and the £4,000 per year that can be saved will attract a 25% government bonus. But it does seem to herald a change of tack by the Government to incentivising savings for retirement.
There has been a mixed reaction to the LISA announcement, with a number of commentators expressing concern that younger people may choose to opt for the flexibility of a LISA over the new auto-enrolment pension and, should they choose to use the LISA towards their first house purchase, may miss out on pension savings altogether.
The LISA proposal plays to two key strengths of building societies, helping people to save and helping them to buy their own home, so we have been broadly supportive. However, we do think it is overly complex, also it risks consigning to the scrapheap the new Help to Buy: ISA, which went live only on 1 December 2015.
We know that politicians love to pull rabbits out hats and Chancellors of the Exchequer clearly relish the theatre of these set-piece speeches to Parliament. This is not the first time the industry has been presented with plans which we think would have been improved by prior consultation.
The main problem we envisage with the LISA is that it conflates short to medium term saving for house purchase, for which certainty of value is key and cash is likely to be the best medium, and longer-term saving for retirement, which is likely to call for a different investment strategy. This combination gives rise to complexity in the structure of the product and presents savers with the invidious choice of putting at risk retirement savings in order to fund a first-time house purchase. Also, the timetable for implementing the LISA –by April 2017 is ambitious.
We would like to see a narrowing of the focus of the LISA, i.e. solely on long-term saving for retirement. We think the Help to Buy: ISA should be able to continue alongside the LISA and those savers who do not purchase a property should be able to transfer their money from the Help to Buy: ISA into a LISA and still be eligible for the government’s 25% bonus.
We believe this this will greatly simplify the design, making it much easier for firms to operate and make the products simpler for customers to understand. We will be urging the Treasury to tweak the design of the LISA on these lines.
Two other savings-related Budget announcements by the Chancellor are certainly worth a mention. The first will see the the annual ISA subscription increasing to £20,000 in April 2017. This will raise the current limit by nearly a third and provide a boost to hard-pressed savers, particularly those approaching retirement and, with the new personal savings allowance from April this year, means only a small percentage of people will need to pay tax on their savings interest.
The second is a new Help to Save scheme aimed at encouraging those on lower incomes to save. This is essentially a re-working of the Saving Gateway scheme which the Coalition ditched in 2010 and will involve the Government providing an uplift of 50% to savings balances up to a maximum of £600 a year for four years. However, the Government uplift is to be paid only after two years, which seems too long for people on lower incomes to wait, given that they will typically be budgeting on a monthly l basis. We will not be alone in encouraging the Government to amend this scheme before it takes effect in April 2018.
So, in conclusion, was it a Budget for savers? I think the answer to that must be yes. Moreover, it is only the latest in a series of Budgets which have launched some quite dramatic changes to the savings landscape and there is likely to be more to come, particularly in the field of saving for retirement. I think we may come to look back on the LISA as just the beginning…