Is the new ISA pension a default to replace pensions?
Whilst a lot of people are breathing a sigh of relief at the lack of pension reform in the Budget I think we do know a little more of where we stand and that is in the middle!
Ironically 2016 is the tenth anniversary of “Pension Simplification” which introduced the concept of the Lifetime Allowance (LTA) and the Annual Allowance (AA). First we had to protect what we had (Enhanced and Primary Protection) and then the two allowances started to go up.
Next, a change of policy and the allowances started to come down. When that happened again we needed to add in some transitional protection.
So we have FP12, IP14, FP14, IP16 and FP16. Add to this a tapered AA and the strange workings of the money purchase AA and we have the pension regime that we have come to know and love.
It is absolutely no wonder people turned to the idea of ISAs, they might not have the same financial benefits as a pension but they are, or at least were, simple to understand. The mantra became, why can’t a pension be more like an ISA?
I think that day is coming as now we have cash ISAs, stocks and shares ISAs, JISAs, innovative finance ISAs, help to buy ISAs and now as announced in the budget “a lifetime ISA”. The principle seems to be if you can’t beat them, join them!
Why can’t we have just one ISA “wrapper” with a range of options?
OK, so it’s early days yet but there are a couple of issues that concern me initially:
- We could well get to the situation where we are forcing people to choose between auto enrolment and joining a workplace pension and starting a lifetime ISA for house purchase. Whilst there is no promise of a matching employer contribution, in addition to tax relief (or Government bonus) under the ISA there will be that emotive and persuasive “house purchase” which will be alluring.
- There is also potentially a trade-off between a one off use of the funds where the property purchased could be sold at any time or funds to assist with perhaps thirty years of retirement.
We must also be wary of increasing house prices. The whole house purchase transaction is based on demand and supply and by creating a savings plan geared towards demand then unless supply increases then prices will likely go up!
On the other side of the coin I can see some advantages for the self-employed as this could be their auto enrolment, but before this is proved, I do feel that we need to nail down a few issues. The circumstances that will allow money to be withdrawn are key as the penalty for offending the rules can be loss of the Government “bonus” and, as it stands, a penalty of 5% of the value.
In the end we could not agree on the Pension ISA and so instead got an ISA Pension but will it be a parallel system or will it ultimately become the default to replace pensions? Time and politics will tell.