Chancellors of the Exchequer love to play God. But the hardest lesson they have to learn is that the most imaginative financial innovations usually have the most surprising unintended consequences.
In his latest Budget, George Osborne, torn over whether to peck at the UK pensions regime or completely overhaul it, has tried to have it both ways: he has left pensions alone but created the Lifetime ISA – immediately nicknamed LISA – that might have replaced them entirely.
As Spectator Money adroitly pointed out last week, pensions had become a farce worthy of Alan Ayckbourn, in which the desire to tinker was hard to resist. And, like Oscar Wilde, Osborne has discovered that he can resist everything – except temptation.
But LISA will enrich the young savers who need it least, while leaving most as far from a decent retirement pot as ever. A LISA holder can save up to £4,000 a year and receive a 25 per cent government bonus on anything put into the account before they reach 50. This could add up to £32,000 in bonuses on a maximum £128,000 saved from age 18 to 40.
But the money saved must be used to buy a UK first home worth up to £450,000, only completely unshackled after the holder reaches 60. The penalty for failing these tests is that all interest and growth that would have been earned on the bonus will be withheld. Full or partial withdrawals incur a 5 per cent charge.
Experts were quick to note that, while the 25 per cent annual bonus leaves normal current interest rates standing, it is little more than the government paying to subsidise pension contributions for basic-rate taxpayers – and those pots can be taken from age 55. Stuart Adam, senior research economist at the Institute for Fiscal Studies, calculates that a pension is still the better deal for those paying the 40 per cent higher-rate income tax.
All this assumes that the present and proposed regimes persist. As we have seen with Child Trust Funds, Venture Capital Trusts and other schemes, governments are more than capable of changing their minds about whether any wheeze is performing as expected or desired.
As LISA is an addition to the range of savings incentives, she will not help the UK economy to break out of its growth straitjacket, or reduce the government deficit. She is a deceptive little minx who might be given the cold shoulder by a future Chancellor.
As it is, she will split the under-40s three ways. The affluent, especially those without a family or mortgage, will simply add this no-brainer of a deal to their occupational pension and build up a tidy sum by the time they reach 60. Bear in mind that, unlike work pensions, LISA carries no employer contributions.
For millions of others it will be ‘either-or’. And for the vast majority it will be ‘neither-nor’. Remember, we are talking about that wonderful, turbulent, maddening, frustrating, exhilarating first 22 years of adult life. Everything is possible and nothing is ruled out.
But the one thing in short supply at that age is money. So much to do, so little cash to do it with, from paying off student loans or buying or renting in the trendiest part of town, to starting a family or ticking off that bucket list while we still have (or had) the time and energy.
LISA? They have her number, and she will flutter her eyelashes seductively, but a bulging bank balance hardly stacks up against that once-in-a-lifetime memory of trekking in the Himalayas or kayaking down the Grand Canyon.
Banks of Mum and Dad will help. I predict lengthy conversations about diverting parental nest eggs to LISA – with a possible divvy up when the child is 60 and the parents are in their 80s – not such an unrealistic scenario these days.
If Osborne is serious about LISA, he should extend the period for contributing to the scheme until at least age 50. That would enable people to catch up once their financial commitments start to ease off.
To the extent that she makes any difference to interest rates, LISA will depress rather than raise them. What we need as a nation is a corporate sector healthy enough to tolerate higher interest rates. That would feed through to raise the living standards of millions of savers who have been starved for the past eight years or more.
I am sure that money in LISAs will be completely safe. But their merits relative to pensions are likely to fluctuate over the next few decades. If I were under 40 and had to choose, I would stick with pension schemes – especially occupational – and leave LISA for the occasional fling when I have more cash.
William Kay is a financial journalist who was city editor of The Times and money editor of The Sunday Times.
Comments