CISI comments on The Budget

Rebecca Taylor CFP^TM Chartered FCSI, CISI Board Director and Managing Director of Aurea Financial Planning said:

“We welcome the announcement of a Lifetime ISA for those under age 40, encouraging this demographic to save or invest for a first property or for their retirement. But a Help To Buy ISA is already available and there is no difference between the government boost in Help To Buy ISA and Lifetime ISA, they both work out as 25%.

Note that the Lifetime ISA allows a higher amount to be saved each year at £4,000 and can be used to purchase a home up to £450k value, whereas a Help To buy ISA is limited to £200 per month after the initial lump sum of up to £1,000 and this is limited to a property of £250k except in London where it is £450k.

Both ISAs are available per person, so a couple can save into an account each and use the combined value to purchase a joint property.  Therefore the value of these vehicles depend on how you are expecting to save and how much you are wanting to save.

You can save into both a Help To Buy ISA and a Lifetime ISA but you can only elect to use one of the pots for the house purchase.  Why were the rules for a Help to Buy ISA simply not relaxed and the two types of ISA kept separate? We believe it is unlikely that the Help To Buy ISA will be expanded beyond the existing timeline. The retirement element of the Lifetime ISA has benefits and drawbacks and needs to be compared to saving into a pension scheme.

Which option is best for an individual will all depend on the tax rate someone is paying now, and what tax rate they are expecting to pay in retirement.

For young savers this is pure guesswork as we are looking so far into the future!  If someone is a basic rate tax payer and doesn’t have access to a salary sacrifice scheme the Lifetime ISA may well be a preferred option.

However, if someone is a higher rate tax payer and can get tax relief on pension contributions at 40%, but expects to pay only basic rate in retirement along with the 25% lump sum which is tax free, this may well be the best option.

If we add in employer contributions then this swings the balance in favour of the work place pension, but an employee paying basic rate tax may want to pay only the minimum required as they do get a higher rebate from a Lifetime ISA.

To complicate things further though, a basic rate tax payer with access to a pension using salary sacrifice, sometimes known as a salary exchange scheme, will effectively get tax relief on contributions at 32%.  The higher the up-front tax rebate/government top up, the faster the funds will grow, but then of course we need to compare the relative expected fund values and take into account one is partly taxable and the other is tax free!

This is unlikely to be a factor for many, but there is another factor to consider, which is that a pension can currently be taken from the age of 55 and the Lifetime ISA from 60.

Lastly, and important for some consumers, is that a pension is written under trust, so is not subject to Inheritance Tax.  A Lifetime ISA will form part of your estate and as such would generally be subject to Inheritance Tax.

Advantages of the Lifetime ISA are definitely there: self-employed people will probably see the attraction, as will lower earners. It is a shame that it is limited to those that are under 40 as many self-employed individuals will miss out on this. It is unlikely that a Lifetime ISA would be preferable to a workplace pension which includes an employer pension contribution.  

We are concerned that people may not make the most sensible decision. ISAs are generally seen as trustworthy, whereas pensions are not. Owing to the bad press surrounding pensions some consumers may opt for the Lifetime ISA without thinking about it, as an alternative to a company pension scheme.

Those who receive financial planning advice will as always be the ones to benefit most, using a combination of all the available schemes for themselves and their immediate family.  More than ever, advice is needed to help people make the best decision that is suitable for their personal circumstances.

In addition, we note a change to employer funded advice: currently if employers spend more than £150 per annum paying for advice for employees, it is a taxable benefit in kind. This is increasing to £500. This will open up the possibility for financial planners to provide far more personal planning advice without the employee being taxed.

Notable in its absence is further tinkering with the pension allowances and one might think it has been left alone as the Lifetime ISA is the first step to overhauling the pension system entirely to a taxed, exempt route.  

Also absent is any increase in the Inheritance Tax threshold.  Whilst a complicated measure was announced last year to allow an increase for properties, this should have been widened to be available to all.  

Increases in tax allowances are always welcome.  ISA allowances will be increased to £20,000 from 2017, although contributions into a Lifetime ISA will be part of this new increased allowance.  A £2,000 increase to the point at which higher rate tax is paid is a significant increase with the personal allowance increase also steadily rising.  

We would hope that the personal allowance will continue to rise at a higher rate than inflation to hit the £12,000 mark so that untaxed income is enough to pay basic household running costs.”