I wouldn’t try to claim supernatural power’s of prophecy, but my review of the year way back in December 2014 did ponder whether the changes announced to pensions and ISAs in the budget that year were a harbinger of the demise of personal pensions. LISA may just have delivered them a fatal blow and confirmed my crystal ball was in particularly good working order when I wrote that blog.
Personal pensions may not have been killed outright by LISA, but in the eyes of the under 40’s they must be staggering blood stained towards their final resting place, coughing up tar-black bile and generally just looking very unattractive.
Information published by Aviva in January this year indicates that:
- Household Debt Rose by 42% in the final 6 months of 2015; and
- The average UK family is saving £105 per month
This suggests that the vast majority can’t afford to save £4,000 a year, particularly on top of compulsory auto enrolment contributions.
One of the biggest barriers to people saving for retirement in pension schemes is the fact that such savings can’t usually be accessed before 55, even in an emergency. It would have been far to messy to start tinkering (again) with personal pensions so instead we now have another tax advantaged savings product, which you can access at any time.
The £1 bonus for every £4 saved offer from the Chancellor looks a lot like Basic rate tax relief on a personal pension contribution. But the fact that there is no tax on the return earned or on money withdrawn makes it look like a pension/ISA hybrid. If you withdraw funds before age 60 you lose your bonus and a 5% charge is payable. If you repay your LISA the amount withdrawn the bonus can be reinstated.
I guess the Chancellor baulked at PISA in case people like me made allusions to unsound structures and dodgy foundations, which I certainly wouldn’t have.
So if you are under 40 and in a position to save a bit and there is a product that combines the best bits of a pension and an ISA would you choose to lock your money away until you’re 55? Maybe if you can afford to be very prudent, but for most people such reckless prudence isn’t affordable.
And for all the kite flying in advance about TEE versus EET the chancellor seems to have gone with a product that effectively delivers EEE for savers. Again tinkering with Personal Pensions to deliver this would have been messy.
Anything that removes barriers to people saving more is a positive development and to be welcomed.
The Ordinary ISA limit has been increased to £20k whilst next year (very) high earners will see their tax relieved pension contributions limited to £10k. Thus those making decisions about workplace saving are likely to have a declining interest in personal pensions as a savings vehicle.
So if I dust down my crystal ball what emerges from its misty core? I see a savings vehicle which will ultimately replace personal pensions. I see it being carefully nurtured and reinforced in future budgets, with personal pensions allowed to wither on the vine. And what does it mean for auto-enrolment, I ask my prophetic orb? Alas the mist returns and my final question goes unanswered.
As John Donne nearly said, never send to know for whom the bell tolls, it tolls for personal pensions.