Budget 2016 – Lifetime ISA vs Pension

Last year’s Budget saw significant changes to pension funding which included the reduction in the lifetime allowance down to £1m for the 2016/17 tax year and introduction of a complex new tapering annual allowance limit for higher earners.

This year’s Budget did bring a few surprises. It was widely anticipated that there would be changes to pensions tax relief and a possible review of pensions salary sacrifice, however it would appear for now that both are unaffected, which came as welcome news to employers and trustees who in recent years have been burdened by numerous pension changes including the introduction of auto enrolment.

The Chancellor has not given up on revolutionising pensions tax relief, and the Government has now introduced a new Lifetime ISA (LISA) to be made available to under 40s from April 2017.

A number of our clients have sought advice following questions from employees, ’should we opt out of the pension scheme and fund a LISA instead’.

LISA vs Pension

To assist please see our comparison of LISAs and pensions.

The idea that people will opt out of pensions to save for a house purchase in a LISA seem to confuse cause and effect. Those who are determined to buy their own home but can’t afford to do that and contribute to their workplace pension will opt out of the pension in any case. The LISA gives them a product that they can use to save for a house purchase, tax effectively, allowing them to get back into retirement saving sooner.

Where an employer pension contribution is being made, it will usually remain best advice for people to stay in their workplace pension and get any employer contribution available to them.

It has to be remembered that the LISA is only available to those under 40 and is limited to £4,000 of savings a year. Older savers with more to invest may still find pensions the best option. We see the LISA as a valuable addition to the savings landscape.

Pension auto enrolment – increase to upper earnings threshold (2016-17)

Every year, the Department for Work and Pensions (DWP) reviews the earnings threshold for automatic enrolment. For employers who are using qualifying earnings band for auto enrolment it is important to note that the annual upper earnings threshold has increased to £43,000 for 2016-17 (£42,385 for 2015-16). The annual lower level of qualifying earnings remains at £5,824 and annual earnings trigger for automatic enrolment at £10,000.

If you would like further information on this subject, please contact Stuart Stroud.