Old Mutual Wealth has dismissed the UK government’s “Lifetime ISA”, unveiled in the 2016 Budget, as a “gimmick” that will undermine the pension system.
Responding to Chancellor George Osborne’s announcement of the scheme on Wednesday, Old Mutual Wealth’s retirement planning expert Adrian Walker said:
“The Lifetime ISA is a gimmick that will only appeal to younger savers looking for help getting on the housing ladder,” he said. “Very few people will use a Lifetime ISA to save for old-age and pensions are still the best retirement savings vehicle.”
How the Lifetime ISA works
Available to Britons under the age of 40, the Lifetime ISA promises to pay participants £1 for every £4 they put into the tax-free wrapper, with an annual limit of £4000. This means if you save $4000 a year, the government will pay you an additional $1000 into the ISA at the end each tax year.
One of its key features is that, as well as being used as a pension saving vehicle, it can also be used to save for a deposit on a first home. In other words, if a participant withdraws the full amount of the ISA to buy a first home aged 40, having put away £4000 every year for 10 years, the government will pay an additional £10,000. If they have put all their disposable income into the Lifetime ISA, and they use the lot for a deposit on a house, this would leave them at the age of 40 without any retirement savings.
Walker predicted this first homebuyer element would prove the most attractive to young savers.
He also suggested that it might be a precursor to a new pension policy, such as a 20% flat rate of pension tax relief or a pension-ISA.
“If government finances deteriorate further, the Chancellor may be tempted to extend its [the Lifetime ISA’s] reach, allowing Government to slash pension tax relief or benefit from income tax on pension contributions upfront,” he said. “It could be a prototype for the pension system of the future.”