FT Adviser (15/07/2019) – Advisers and employers could turn to Isas for long-term saving if the lifetime allowance (LTA) is not scrapped, according to Dunstan Thomas.
The LTA was introduced in 2006 and is the limit on the amount that can be saved in a pension scheme without triggering an extra tax charge.
The LTA started at £1.5m and has previously been as high as £1.8m but it currently sits at £1.05m, which makes planning difficult for advisers and clients, according to Adrian Boulding, director of retirement strategy at the technology solutions provider.
There have been calls from the pensions industry for the government to scrap the LTA as individual face 55 per cent tax bills after exceeding the limit.
In the absence of scrapping the LTA, employers and advisers may need to consider recommending long-term saving in Isas for younger people, at least in their first few years, suggested Mr Boulding.
He said if individuals were going to run out of their pensions allowance anyway then it would be better to waive contributions early on when they would have received 20 per cent tax relief rather than later, when they might receive 40 per cent.
This is because younger individuals tend to be classed as basic rate taxpayers but as they earn more throughout their life they become higher rate taxpayers and therefore receive more tax relief on their savings.
In March 2019, a report from pension provider Royal London found that 290,000 pension savers approaching retirement had already breached the then £1.03m LTA limit with many savers continuing to pay in.
Mr Boulding also suggested that the Lifetime Isa (Lisa) may be a better option for younger savers looking to save to buy their first home rather than saving into a pension pot.
Similarly, Alan Chan, director at IFS Wealth and Pensions, said: “The LTA is not an issue for the vast majority of people, and even less of a concern for young people who will not be taking benefits for another 30-40 years’ time and it is only then that their pension benefits will be assessed against the LTA. Who knows what the LTA will be by then or if it will even be around anymore?
“So in the absence of scrapping the LTA, it would change nothing and pensions are still the best long-term investment vehicle for young savers.
“A Lisa may be considered in addition to a workplace pension where there are excess savings but they should not be mutually exclusive.”
Full article link: https://www.ftadviser.com/pensions/2019/07/15/young-savers-could-turn-to-isas-to-avoid-tax-charge/