Britain | Savings

A nicer ISA?

A new scheme adds to tax complexity

A FEW weeks ago the big change in the budget on March 16th was expected to be a radical revamp of the tax rules on pensions. That idea was abandoned in the face of industry and backbench opposition. But George Osborne, the chancellor, has introduced a scheme that might eventually become the basis for reform—a lifetime individual savings account (ISA). Patrick Bloomfield of Hymans Robertson, a benefits consultancy, described it as “essentially a new pension regime through the backdoor and the first step on the path to a pensions ISA for all”.

The new scheme, which will start in April 2017, will be open to those aged between 18 and 40. They will be able to pay up to £4,000 a year ($5,700) into the tax-free account, and the government will pay a bonus of 25% of the amount invested each year until the age of 50. The money can be withdrawn to buy a first home with a value of up to £450,000 without penalty. If the money is left alone until the saver is aged 60, it can be withdrawn tax-free; if the money is withdrawn from the account earlier for any other purpose, the government will reclaim the bonuses (plus any investment return made from them) and charge a 5% penalty.

With three separate age requirements and three different tax treatments, the new scheme will add to the complexity facing savers. It will also operate alongside other ISA schemes, including the help-to-buy ISA (also designed to encourage homebuyers) and the cash, stocks-and-shares and innovation ISAs, whose annual savings limit will rise from £15,000 to £20,000.

The flexibility of the scheme may tempt more youngsters to save. But it could persuade others to opt out of their company pension plans. That would run counter to the government’s introduction of auto-enrolment into pension schemes. Steve Webb, a former Liberal Democrat pensions minister who now works for Royal London, an insurance company, warned: “Just at the point that millions of under-40s have started pension saving for the first time, the chancellor has set up a rival product which risks causing mass confusion.”

Savers attracted by the government bonus may forget that, under corporate pension schemes, employers usually match the employee’s contribution—the equivalent of an uplift of 100%. And cautious youngsters may keep their lifetime ISAs in low-yielding cash, rather than riskier assets like equities that tend to yield higher returns over the long term. That may mean savers end up with inadequate pensions.

Another question is whether the new scheme is well targeted. Many young people are on low salaries and are struggling to pay off student debts; they may not have the ability to save £4,000 a year. Those with rich parents, however, may find that the Bank of Mum and Dad will chip in. Even so, with £40,000 needed to fund the average deposit on a first home, it will take many years for savers to reach their goal. A house-building programme that brought down prices might have been a simpler, and better, answer to the problem.

This article appeared in the Britain section of the print edition under the headline "A nicer ISA?"

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