After Chancellor George Osborne’s radical pension freedoms introduced last year, he had been expected to introduce even more sweeping changes to UK pensions’ legislation in the Budget delivered on 16 March 2016. Mr. Osborne had been considering introducing either a flat rate of tax relief on pension contributions (which would have negatively affected higher rate tax payers in the UK) or a pension ISA which would have ended upfront tax relief on pension contributions.
However, in a surprise announcement shortly before the Budget, it was confirmed that the Budget would not include any radical changes to UK pensions’ tax relief. It was widely reported that the shelving of plans to overhaul pensions’ tax relief was due to fears of upsetting Conservative MPs ahead of the Brexit referendum in June this year.
The pensions industry are welcoming the status quo for now which ends months of intense speculation about what changes were to be announced. Despite not introducing swingeing changes to pension taxation, in an effort to help younger people and lower earners save more, the Lifetime ISA was introduced (referred to by some as the “LISA”).
The LISA will be introduced from April 2017 and enable any person under 40 to save up to £4,000 per year. In return, the UK government will give a 25% bonus on this money. Contributions can continue to be made with the bonus until age 50. Money in the LISA can be saved until age 60 and can be used as retirement income or can be withdrawn to buy a first home. The government will set a limit for property purchased using the LISA at £450,000. Certain restrictions on drawing down the LISA will also apply. The total amount that can be saved each year into all ISAs will be increased from £15,240 to £20,000 from April 2017.
While generally well received, the LISA does little to help the “squeezed middle” of 40-55 years olds in the UK who are not saving enough for retirement. In addition, some worry that by adding another savings option, the LISA creates general pension confusion as people struggle to determine which savings option is best for them in the short and long term. For US taxpayers, as for US tax purposes, UK ISA’s do not receive the tax deferred roll-up status that they do for solely UK taxpayers, the LISA is unlikely to be attractive in any event.
Other key announcements in the March Budget regarding UK pensions included some technical amendments required to correctly implement the new pension freedoms. Examples include:
Other key announcement which could impact UK expatriates include: