A radical plan to encourage young people to begin saving for their retirement is being considered by Chancellor George Osborne for next week’s Budget.
The Huff Post UK understands meetings have been taking place in the Treasury to discuss creating Lifetime ISAs – a cradle-to-grave form of savings which would see contributions from individuals and the Government.
The Chancellor was thought to have backed off changing some elements of pensions tax relief, but he is expected to want to make some progress to help savers who have lost out thanks to seven years of low interest rates.
The plan was initially floated by think-tank the Centre for Policy Studies (CPS) in 2014, and would lead to a significant reform of the UK pensions industry if announced in the Budget next Wednesday.
Under its proposal the Government would contribute 50p for every £1 invested into a Lifetime ISA – up to £8,000 a year.
A person would be able to take out any of the money they have stashed in the Lifetime ISA – known as a Lisa – at any time, but if they do so before retirement they would have to repay money to the Treasury.
Michael Johnson, who authored the CPS report, told The Huffington Post UK this afternoon: “ISAs are popular, and still trusted, whereas “pensions saving” products are not. The word “pension” does not resonate with Generation Y / millennials, but they are engaged with ISAs, perhaps the last trusted brand amongst savings products. The Lifetime ISA would appeal to them, thereby re-engaging them with retirement saving.”
He added: “The motivation to leave the money saved until 60 would come from taking away the 50p from any £1 taken out before retirement, but you would have ready access and would be free to make withdrawals at any time.”
The Lisa would replace the Isas currently available for cash and stocks and shares.
Pension contributions from employers would be paid into the Lisa, and these would be eligible for the Treasury’s 50p contribution.
Effectively, workers would be able to get £12,000 worth of savings each year in exchange for putting in just £8,000.
However, while the policy would benefit those on a lower tax rate, it would penalise those in the higher bands.
Under the current system, tax relief on pension contribution is linked to someone’s income tax band – meaning those on higher bands actually get a better deal.
If someone on the 20% basic rate of tax pays in £80 to a pension scheme, the Government will top that up with £20 to make £100.
However, if you are a 40% tax payer, you only need to put in £60 to get £100, as you can claim £40 from the Government.
Likewise, 45% tax payers only have to invest £55 to get £100.
Under the Lifetime ISA, investing £100 would get you £150 regardless of your tax rate level. Basic rate taxpayers are proportionately better off, whereas higher and additional rate payers don’t do as well.
If Osborne does push ahead with the Lisa plan it could provoke anger from Tory backbenchers worried about the potential hit on the savings of middle and upper earners.
It was reported that the Chancellor had already scrapped plans for one shake-up of the system, which would have seen the introduction of a flat-rate of tax relief on pensions contributions.
However, by pitching any reform as incentivising young people to set money aside early in life, Osborne may be hoping he can show this would stop young Britons having to increasingly rely on the Bank of Mum and Dad.