This poorly designed product could lead to more pensioner povertyby Ros Altmann / August 25, 2016 / Leave a comment
In the 2016 Budget, the government proposed a new product to add to the tax-incentivised savings landscape—a “Lifetime ISA”—available to people aged between 18 and 40 from next April, in which they can save up to £4,000 a year. Any savings they put in before age 50 will receive a 25 per cent bonus from the government. The money in Lifetime ISAs can be used by first-time home buyers, or kept until age 60 and then withdrawn free of tax.
However, there are suggestions that financial providers may not want or be able to offer the Lifetime ISA by the time of its launch. Some have ruled out participating, others have said they are not sure yet. This is just as well, because Lifetime ISAs have been poorly designed. If the government wants to assist people to purchase homes, then a Help to Buy ISA already exists. But using an ISA product as a pension could be a disaster—it could even destroy pensions.
The behavioural incentives in Lifetime ISAs are wrong for pension saving. With private or workplace pensions, no money can be withdrawn until age 55. Thereafter, people can take as much or as little as they want, with 25 per cent of the fund being taken tax-free. Amounts above the tax-free portion are subject to tax, which provides a powerful disincentive to spend too much too soon.
But with a Lifetime ISA, the entire sum can be taken tax-free from age 60. People will obviously be tempted to take their money straight away, especially as many may fear a future government will want to recover some of the 25 per cent bonus and impose a tax on withdrawals after all. This will increase the risk of more pensioner poverty in future as most of the money will be spent around age 60, with little or nothing left at age 80 or beyond.