The recent publication of the Savings (Government Contributions) Bill confirmed that the Government intends to press ahead with the Lifetime ISA, to be launched in April 2017. This is welcomed.
Questions of detail remain, but there is a growing sense of inevitability about the UK gravitating towards a purely ISA-centric framework. This is reinforced by the following observations.
- The introduction of “freedom and choice” (April 2015), ending the annuitisation requirement, is fundamentally incompatible with tax relief on pensions contributions. It exposes the Treasury to an expensive arbitrage, in that within a few days either side of the age of 55 one can claim tax relief and then the 25% tax-free lump sum.
It also contradicts some fundamental tenets of the pensions framework, captured in the final report of Lord Turner’s Pensions Commission: Since the whole objective of either compelling or encouraging people to save, and of providing tax relief as an incentive, is to ensure people make adequate provision, it is reasonable to require that pensions savings is turned into regular pension income at some time.
The Treasury’s 2006 review of the annuities market is equally clear: the fundamental reason for giving tax relief is to provide a pension income. Therefore when an individual comes to take their pension benefits they can take up to 25 per cent of the pension fund as a tax-free lump sum; the remainder must be converted into a pension – or in other words annuitised.
With the advent of “freedom and choice”, this no longer applies.