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RIP pensions: piecing together govt's savings strategy

The government’s recent rhetoric on savings has set tongues wagging on the future of pensions, as their increasing inflexibility could drive young savers towards the new lifetime ISA.

RIP pensions: piecing together govt's savings strategy

The past few weeks have provided us with enough speculation that the Treasury is on the verge of abandoning pensions to make even the most relaxed of pension providers jumpy.

The Treasury’s publication of an infographic on ways to save in 2017 featured a variety of ISAs, including the lifetime ISA. It says ‘the lifetime ISA can also be used to save for retirement. From your 60th birthday you can take out all the savings for any purpose’. However, it did not mention the word pensions. This acted as a gasoline can to this fire of rumours. Many who work in the pensions industry were quick to call it a threat to the current system: the former pensions minister Ros Altmann did not hold back, claiming ‘pensions are in mortal danger’.

The issue was raised in the House of Commons and pensions minister Richard Harrington (pictured) tried to pour cold water on claims the government was downgrading the role of pensions by emphasising the efforts put behind auto-enrolment. But statements made in the House of Lords this month would be enough to conjure up significant concerns.

Young targets

The commercial secretary to the Treasury and Conservative peer Lucy Neville-Rolfe was challenged on the lifetime ISA, who said it was created out of the pensions tax relief consultation and made because young people find pensions ‘inflexible’.

‘When we did a consultation on pensions tax relief back in 2015, we found that younger people could find pensions inflexible,’ she said. ‘So we looked at what more we could do to provide more choice and flexibility for them. That is why we designed the lifetime ISA, to offer as a complement to the pensions system.’

When that pensions tax relief consultation began it was hinted, by the then chancellor George Osborne, that pensions could be taxed like ISAs. However, the pensions system avoided the complete overhaul reform would have entailed.

Put Neville-Rolfe’s comments in the context of what the Treasury has been doing to pensions recently, and it is revealing about the government’s direction of travel.

Confusing changes

At almost every Budget and Autumn Statement, chancellors George Osborne and Philip Hammond dished out further adjustments to the lifetime allowance, the annual allowance and, the latest addition, the cut to the money purchase annual allowance (MPAA) to £4,000.

Such moves have inevitably made pensions more complicated and inflexible: just try explaining the complexities of the tapered annual allowance to the average millennial.

If the government is continuing to make pensions more complicated and inflexible, it is easy to see why young savers would gravitate towards the lifetime ISA and away from pensions. The Treasury has estimated 800,000 young people will be saving into the lifetime ISA by 2021.

Pension replacement

When the new lifetime ISA is rolled out in April, it will usher in a new savings era. Young people will be given the flexibility to choose between either pensions or ISAs to save for retirement.

If the Treasury continues chopping, changing and limiting tax allowances within pensions, this will detract from its attractiveness as a savings vehicle. If young people already prefer a flexible option, they will want to continue down this lifetime ISA route, with more and more taking it up.

While the Treasury infographic was probably more of a civil servant slip-up than anything more sinister, if the current government’s thinking around saving continues, it will be selling savers the ISA route rather than the pension one.

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