LISA Seminar Tuesday 4 th October 2016 CMS Cameron McKenna

Transcription

1 LISA Seminar Tuesday 4 th October 2016 CMS Cameron McKenna

2 Jeffrey Mushens

3 Agenda Opening remarks by Jeffrey Mushens, Technical Policy Director, TISA Chair Leigh Pegrum, Manager, PWC LISA Administrative Burdens Sue Campbell, Senior Product Development Specialist, IFDS How will LISA be administered? Issues and challenges Tom McPhail, Head of Retirement Policy, Hargreaves Lansdown Preparing for LISA Coffee Break Carl Emmerson, Deputy Director, Institute for Fiscal Studies Taxing saving: ISAs, LISAs and pensions compared Tom McCarthy, Senior Policy Advisor, Lifetime ISA Policy, HM Treasury Q & A Session Rob Booth, Director of Investment and Production Development, NOW:Pensions Does the Lifetime ISA threaten the success of auto enrolment? Daniela Silcock, Head of Policy Research, Pensions Policy Institute What can international evidence teach us about Lifetime ISAs? Closing remarks by Jeffrey Mushens -

4 Leigh Pegrum

5 Lifetime ISA Administrative Burdens

6 Lifetime ISAs Overview Save up to 4,000 a year Open a Lifetime ISA between the ages of 18 and 40, and any savings (up to 4,000 per tax year) invested before 50th birthday will receive an added 25% bonus from the government. 25% Government Bonus The savings and bonus can be used towards a deposit on a first home worth up to 450,000. After 60th birthday all the savings can be taken out tax-free. Money can be withdrawn at any time before 60, but they may lose the government bonus (and any interest or growth on this) and also have to pay a 5% charge. PwC

7 Lifetime ISAs Administrative Burdens Help to Save Enhanced system builds PwC

8 Lifetime ISAs Government Bonus New requirement, never seen before Return required by HMRC format and frequency unknown Maximum annual bonus of 1,000 per account (maximum total bonus of 32,000), unless making use of the transitional measure discussed later How will you calculate the bonus required? How will you submit the returns? How will you allocate payment once received? System enhancements / manual workarounds PwC

9 Lifetime ISAs Help to Buy Transfer Transitional measure: during 2017/18 tax year savers can transfer any funds already built up as part of a Help to Buy: ISA before 6 April 2017 into a LISA without these amounts counting towards the LISA contribution limit. Full 25% bonus will be received on the transferred funds Maximum Contribution Help to Buy ISA Lifetime ISA 200 per month 4,000 per year Maximum Bonus 3,000 32,000 Eligibility Age 16 and over Between 18 and 40 From tax year 2018/19 any transfers from Help to Buy: ISA will count towards the LISA contribution limit Withdrawal Allowance Availability First home purchase up to 250,000 in the counties or 450,000 in London New account until 30/11/19 Existing until 01/12/30 First home purchase up to 450,000 or over 60 From April 2017 PwC

10 Lifetime ISAs Stricter Withdrawals First home up to 450,000 Retirement. Over 60 PwC 25% penalty charge on early withdrawals for many other purposes. This will include the government bonus pay back, interest gained on that bonus payment plus an additional charge to the government

11 Lifetime ISAs Trained Resource IT training Withdrawal queries New processes and procedures Interactions with other ISA products Bonus/withdrawal calculations PwC

12 Lifetime ISAs Administration Costs Some asset managers may decide not to offer LISAs due to high administration costs driven by: Government bonus delay in payments especially first year (prefunding) Continuous oversight of the accounts Enhanced trained resource Stricter withdrawals Additional communications to clients PwC

13 Help to Save Assist low income households to help them save for a rainy day. Strict eligibility rules: Working tax credits or Universal credits and earn the equivalent of 16 hours per week at minimum wage The scheme will see those eligible able to save up to 50 a month and receive a bonus of 50% a maximum of 600 after two years. Savers can continue to use the scheme for a further two years and earn up to another 600. This scheme is expected to be implemented in April PwC

14 Lifetime ISAs Compliance Landscape HMRC has announced the next stage of our Building Our Future transformation to be implemented from October HMRC is transforming into a smaller, more highly-skilled operation, based in fewer locations and offering modern, digital services to customers A Customer Compliance group (to be introduced), which will tackle non-compliance and enforcement for all customer groups, including large businesses, led by Jennie Granger Not yet known at this stage what this means for compliance enforcement but possibly detailed reviews by specialists which could lead to more detailed challenges PwC

15 Thank you This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it." 2016 PricewaterhouseCoopers LLP. All rights reserved. In this document, 'PwC' refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. PwC

16 Sue Campbell

17 Tom McPhail Hargreaves

18 Carl Emmerson Institute for Fiscal

19 Taxing saving: ISAs, LISAs and pensions compared Carl Emmerson Presentation at TISA seminar on LISAs, London 4 th October 2016 Institute for Fiscal Studies

20 Taxation of saving Three components of savings that may be taxed (T) or exempt (E) TTE TEE EET income saved; returns generated; funds withdrawn doesn t allow individuals to benefit from tax-rate smoothing taxes the normal rate of return, distorting individuals towards spending now rather than saving for future spending doesn t allow individuals to benefit from tax-rate smoothing doesn t tax the normal rate of return, but also doesn t tax above normal returns to saving allows individuals to benefit from tax-rate smoothing doesn t tax the normal rate of return but does tax above normal returns better aligns tax receipts with public finance costs of ageing Institute for Fiscal Studies

21 How does UK pensions tax depart from EET? More generous than EET: one quarter of a private pension can be drawn as a lump sum free of income tax employer contributions roughly three-quarters of the total escape National Insurance Contributions entirely Less generous than EET: annual and lifetime limits on how much can be saved in a taxadvantaged private pension corporation tax and stamp duties are levied as some returns accrue Cost of income tax and NICs relief, relative to an EET benchmark, probably close to half the official 35bn estimate Institute for Fiscal Studies

22 Do financial incentives affect saving decisions? Much evidence that financial incentives affect where saving is held Whether overall level of saving is affected is far less clear disagreement within the literature even when looking at the same reform using the same data household saving or national saving? whether looking at different types of households? Institute for Fiscal Studies

23 Household wealth Aggregate data show that pensions more important form of saving than ISAs in 2012 about 70 billion contributed to funded private pensions ( 50bn to self-administered schemes, 20bn to personal pensions), with total fund value of over 2 trillion (in 2011) unfunded public-sector pensions schemes have an estimated liability of just over 1 trillion (as of March 2013) compares to 57 billion contributed to adult ISAs, with a total fund value of 470 billion (in ) Institute for Fiscal Studies

24 Sources of household wealth (2010/12) Mean household wealth = 340,888 Institute for Fiscal Studies Notes: Includes private pension wealth, excludes state pension wealth. Source: Crawford, Innes, and O Dea (2015) using data from the Wealth and Assets Survey.

25 Sources of household wealth (2010/12) Mean household wealth = 340,888 Private pension wealth (includes annuties and claims on partially funded and unfunded pensions), 148,068 Primary housing, 124,968 Other, 67,852 Institute for Fiscal Studies Notes: Includes private pension wealth, excludes state pension wealth. Source: Crawford, Innes, and O Dea (2015) using data from the Wealth and Assets Survey.

26 Sources of household wealth (2010/12) Mean household wealth = 340,888 Private pension wealth (includes annuties and claims on partially funded and unfunded pensions), 148,068 Primary housing, 124,968 Other net financial wealth, 17,407 Shares (excl. employee shares), 5,591 ISAs (cash and equity), 10,312 Buy-to-let and other houses, 13,100 Other property, 6,673 Net current and savings accounts, 14,769 Institute for Fiscal Studies Notes: Includes private pension wealth, excludes state pension wealth. Source: Crawford, Innes, and O Dea (2015) using data from the Wealth and Assets Survey.

27 1000 s Annual limits on saving in pensions and ISAs Pension annual allowance ISA annual limit Annual pension limit 34 times larger than the annual ISA limit

28 1000 s Annual limits on saving in pensions and ISAs Pension annual allowance ISA annual limit

29 1000 s Annual limits on saving in pensions and ISAs Pension annual allowance ISA annual limit Unless income > 210k Annual pension limit only in which case pension limit twice the annual ISA limit half ISA limit

30 Lifetime ISA Similar to 2005 Conservative manifesto proposal Accounts can be opened by year-olds from April 2017 Contributions count towards ISA limit; like ISAs, no tax on returns While aged 18-50, government will add 25% to up to 4,000 of contributions each year so over 32 years, max 32,000 top-up on 128,000 of contributions Can withdraw from age 60, or earlier to buy 1 st home for < 450,000 if withdraw earlier for other purposes, 5% charge + lose the top-up So, for those saving for retirement or for first home, significantly more generous than TEE (ISA-style) treatment Institute for Fiscal Studies

31 What does HMT expect? HMT has published shockingly little information on what they are expecting Budget costing of introducing LISAs and raising ISA limit to 20k combined: 850m in no breakdown provided on the cost of the two individual policies Also no estimates published on number of LISAs expected to be opened average balance in each account extent to which this is expected to represent new saving or shifting existing funds Policy could be expensive if take-up is high 850m costing suggests to me that HMT expects many of those eligible will not choose to take one out Institute for Fiscal Studies

32 Lifetime ISA Clear rationale for encouraging saving for retirement though less so when use of money from age 60 unrestricted (of course the same point applies to saving in a DC pension) Less clear rationale for encouraging saving for a home more than other pre-retirement consumption OBR expects it to increase house prices by 0.3% Expect lots of shifting existing savings to new vehicle in 2013, 3.2m under-45s had more than 3,000 in ISAs Big winners: basic-rate taxpayers who can transfer existing savings and higher-rate taxpayers saving for 1 st home Some might delay purchase of first home: incentive to continue to build up match before making purchase Institute for Fiscal Studies

33 Contribution required to match 100 saved in ISA By marginal tax rate in work and in retirement Basic, basic Higher, higher Higher, basic Basic, zero ISA Lifetime ISA Employee pension contribution Institute for Fiscal Studies Employer pension contributions still more generously treated an employer match is also a strong incentive to make an employee contribution Can gradually shift money from lifetime ISA to pension from age 60 benefit from lifetime ISA top-up and pension tax-free lump sum

34 Conclusions Strong argument for EET tax treatment of retirement saving ratio of pension:isa annual limit was 32 but is to fall to 2 (and for some to as low as ½) For those saving for retirement or for their first home LISAs offer more generous tax treatment than ISAs LISA tax treatment more generous than that of pensions unless: higher rate taxpayer when working, basic rate in retirement receiving an employer match making pension contributions via salary sacrifice But for some it is not one or the other accumulate funds in a LISA before shuffling into a pension: up-front government match plus 25% of final fund free of income tax Institute for Fiscal Studies

35 Taxing saving: ISAs, LISAs and pensions compared Carl Emmerson Presentation at TISA seminar on LISAs, London 4 th October 2016 Institute for Fiscal Studies

36 Tom McCarthy HM

37 Rob Booth

38 Does the Lifetime ISA threaten the success of auto enrolment? Smarter. Simpler. Better. Smarter. Simpler. Better. 38

39 So many questions Has auto enrolment been a success so far? If yes, will it continue to be so? Will the LISA be seen as an alternative to a Pension? What impact will LISA have on member behaviour? What about employer behaviour? Is this just the beginning of a long term savings revolution? Smarter. Simpler. Better. 39

40 Work and Pensions Committee May 2016 so far been a tremendous success.additional 6.1 million people are. saving for their retirement, with many more to follow crucial and risky stage of its development opt-out rates are low It is imperative that it is not undermined by other governmentsponsored forms of saving Smarter. Simpler. Better. 40

41 2017 Review of Auto Enrolment Key Areas that should be tackled Removal of qualifying earnings Consideration of the trigger Sort out the net pay anomaly Rebalance contributions to minimise opt-outs Set the road map for increasing contributions beyond 8% Smarter. Simpler. Better. 41

42 So, we are far from a job well done Any obstacle in the road is dangerous Increasing contributions will increase opt-out rates 8% of band earnings must be just the starting point Small employers need more support Promotion of LISA will raise questions amongst employers and savers which maybe didn t exist Smarter. Simpler. Better. 42

43 How nervous should we be? A YouGov poll said that 44 per cent of Britons between the age of 18 and 39 would favour using the government s new lifetime Isa in order to put money aside for older age. Such a decision would put them on a collision course with auto-enrolment City AM August 2016 Smarter. Simpler. Better. 43

44 LISA the new kid on the block Smarter. Simpler. Better. 44

45 H M Treasury Smarter. Simpler. Better. 45

46 H M Treasury Smarter. Simpler. Better. 46

47 LISA or Workie Smarter. Simpler. Better. 47

48 You know what you re like Jeff put it into a pension, then you won t be able to touch it Lucky we re loaded - We should put as much as we can into both I wish the Government had a clear policy You ve got to stick with the pension first to make sure you get contributions from your Company LISAs won t last remember those Child Trust Funds? Smarter. Simpler. Better. 48

49 They re all so boring I m always being told I should have an emergency fund I can get my money out from a LISA if I need to I m going to have to pay 5% of my salary to my pension LISA has no minimum and I can vary it Steve and I want to buy a house as soon as we can so we re both going to save in a LISA we can t afford a pension as well What about those poor BHS pension members I wouldn t trust pensions so I m going to go for the LISA Smarter. Simpler. Better. 49

50 The Logical Argument Age 60 Projected Fund Value Fund attributable to member s savings Net Available Fund Available Fund as a percentage of member s savings Pension 973, , , % LISA 599, , , % Age 50 Projected Fund Value Fund attributable to member s savings Net Available Fund Available Fund as a percentage of member s savings Pension 533, , ,000 92% LISA 327, , , % Start at age 22. Individual pays 4,000 pa out of take home pay. Investment return of 5% net of all charges. Assumes auto enrolment contributions increase in line with current legislation. Pension Liberation assumes 55% tax charge only Smarter. Simpler. Better. 50

51 The Emotional Argument OR Smarter. Simpler. Better. 51

52 Employer Influence LISA membership instead of auto enrolment will save the employer It s illegal to encourage staff to opt-out of auto enrolment It s not illegal to: Promote a workplace ISA Talk about the advantages of a LISA Sit back and see what happens Smarter. Simpler. Better. 52

53 Is AE heading towards a Perfect Storm? Smarter. Simpler. Better. 53

54 Conclusions The Work and Pensions Committee had two fundamental recommendations Have those recommendations been implemented? they should be 1. We recommend the Government develop a communications campaign that highlights the differences between the LISA and workplace pensions 2. The Government should also conduct urgent research on any effect of the LISA on pension saving through AE Smarter. Simpler. Better. 54

55 Daniela Silcock Pensions Policy

56 What can international evidence teach us about Lifetime ISAs? Daniela Silcock, Head of Policy Research, Pensions Policy Institute TISA 27th September

57 We d like to thank... Royal London - for sponsoring this project

58 Contents LISA - an alternative option for pension saving How do other countries treat early access? What lessons can we draw from international evidence? Questions?

59 LISA An alternative option for pension saving Being introduced in April 2017 Alternative savings vehicle which is TEE (small t), and Small t - because of up to 1,000pa (25% government matching contribution) until age 50, forfeited if withdrawn before age 60 Allows early access for house withdrawal without forfeit of bonus

60 LISA not a workplace pension LISA is being framed as a way to save for retirement However under current plans it does not fall under pension or automatic enrolment regulations People in LISAs currently don t qualify for an employer contribution It is unclear whether retirement income options at retirement will resemble those available to pension savers

61 Contents LISA - an alternative option for pension saving How do other countries treat early access? What lessons can we draw from international evidence? Questions?

62 How do other countries treat early access to pension savings? Canada United States Singapore Australia New Zealand

63 There are many different ways of structuring early access Overview of pension system Australia Minimum age of access is 55 rising to 60 New Zealand Contributions are taxed, returns and withdrawals are tax-free Minimum age of access is 65. Contributions and returns are taxed, withdrawals are tax free USA Minimum age of access is Contributions and returns for 401(k)s and IRAs are given tax relief. Roth 401(k)s and IRAs are taxed at source with relief given to returns and withdrawals. Early access features Early access for - health problems, financial hardship, leaving employer after age 60 Early access for - health problems, purchase of first home, financial hardship and emigration. People may borrow up to half of funds in 401(k) plan, up to 50,000. Other points of relevance The 2016 Budget included a proposal to place a retrospective cap of AS$1.6m on pension withdrawals NZ has a relatively generous state pension - when house purchase reduces pot size, people may still have adequate retirement savings Roth-IRAs invested more in equities than traditional IRAs3 possibly as there are no minimum withdrawal requirements.

64 Contents LISA - an alternative option for pension saving How do other countries treat early access? What lessons can we draw from international evidence? Questions?

65 Employers are not required to contribute into a LISA Unlike workplace pensions, employers of LISA members are not required to contribute Previous PPI research indicates that the absence of the employer contribution could reduce pot sizes by a third at retirement Unknown whether LISAs will be made automatic enrolment qualifying schemes at some point in the future or offered beside schemes

66 Many other early access schemes require repayment of loan US, Canada and Singapore require loan repayments Mitigates loss of funds though cannot make up for total loss (compound interest) US repayments require interest above inflation Can be problematic - some evidence that loan defaults are prevalent in Canada and USA incurring tax charges and penalties

67 Early access might lead to more conservative investment approaches Some evidence that early access leads to more conservative investments 401(k)s tend to be lower risk than IRAs (which don t allow borrowing) Long term vs. short tem savings = different investment approaches Lower-risk investments could reduce pot sizes for those using LISAs as retirement savings

68 There may be reduced incentives to withdraw LISA savings in a phased way Retirement saving and early access schemes in other countries are generally subject to tax rules which encourage phased withdrawals (Canada, USA EET) Lack of restrictions may cause LISA savers to withdraw in large lump sums, depleting savings earlier than from private pensions

69 LISA savers are unlikely to have the same options for income conversion as DC savers Drawdown and annuities designed to work within the pensions tax system and provide people with ongoing income streams LISA savers unlikely to use taxed products it s not clear at present whether there will be LISA products designed to help support retirement

70 It is not yet clear how LISAs will be regulated LISAs are not framed as workplace pensions and therefore not subject to same regulations LISA savers may not be protected by special measures such as charge cap and provision of free guidance Higher charges (0.3% vs. Stakeholder) can reduce pots by 13% by retirement

71 LISA providers might need to monitor eligibility and compliance In other countries, early access facilities monitored and administered by combination of provider, employer and government As LISA providers will be responsible for managing early access will this increase administrative burden resulting in higher charges for members?

72 Key lessons from international evidence for the UK Early access is associated with lower-risk investment approaches Forgoing employer contributions in LISAs can reduce pension pots by a third LISA providers might need to regulate and monitor compliance this could lead to higher charges PPI PENSIONS POLICY INSTITUTE TEE systems are not guaranteed governments may impose taxes at a later date LISAs contain less inherent protection than international schemes There is less encouragements to phase withdrawals from LISAs LISA savers may not be protected by charge caps and other pension regulations A lack of repayment facility can reduce future retirement income LISA savers may not have access to the same retirement income products as pension savers

73 Contents LISA - an alternative option for pension saving How do other countries treat early access? What lessons can we draw from international evidence? Questions?

74 Thank You! TISA Dakota House 25 Falcon Court Preston Farm Business Park STOCKTON-ON-TEES TS18 3TX