HM Treasury has issued a new factsheet titled “Ways to save in 2017”, which describes Premium Bonds and the various forms of ISA but omits any reference to pensions.
A similar factsheet issued in 2016 contained no such omission, and this has prompted suggestions that the government may be seeking to position ISAs – and in particular the new Lifetime ISA – as a more attractive medium than pensions for retirement savings.
Apart from riskier investments such as Venture Capital Trusts, pensions are the only form of saving which provide tax relief on contributions, and the cost to the Treasury is massive. They also offer relief from National Insurance contributions and permit employer contributions. ISAs, by contrast, simply offer exemption from tax on the proceeds, plus a potential 25% bonus on Lifetime ISAs (‘LISAs’) at the age of 60.
Since tax relief on pension contributions is available at savers’ highest personal rates of tax, the current system favours the higher paid, which is inconsistent with the government’s aim of encouraging the less well-off to save for retirement.
There have been suggestions that a standard rate of tax relief of say 30% should be introduced (which would benefit 20% taxpayers) and even that tax relief on contributions might be scrapped altogether.
We will discover in the Chancellor’s Budget statement on 8 March whether the Government proposes to grasp this nettle, but for the time being it clearly makes sense for higher-rate taxpayers to take full advantage of the current pension regime while it lasts.
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