DIY Investor Magazine
/
March 2017
35
‘IS THE LISA A STALKING HORSE FOR PENSION TAX
RELIEF REFORM?’
on LISA. This will be a relief to providers worrying about
how to certify a first purchase, with solicitors subject
to their own regulator, the SRA. LISA has advantages
over the 500,000 or so Help to Buy ISAs sold to date
particularly for first time buyers for properties of up to
£450,000; the Help to Buy ISA only pays out a bonus
on completion of the purchase – too late (unless there
is bridging finance – another cost) to assist with the
purchase.
It is expected that many Buy to Let ISA Investors will
look to transfer to LISA so that they can use their
investments and HMRC handouts at the time of
exchange rather than completion – a much greater
incentive than the Help to Buy ISA. Additionally, usually
being a couple, LISA investors can each open an
account and independently receive the 25% on their
savings - a great advantage over the Help to Buy ISA.
You can hold both a Help to Buy ISA and a LISA - in
fact it may be beneficial to open a LISA as you still have
that transfer option and you need to trigger the one year
holding for the LISA; even £1 to the LISA would do to
get the one year bar off to a good start.
So what of the FCA concerns? Well unless a LISA is
cashed in to support a first time property purchase or
to support retirement savings at 60, many will think that
the 25% penalty just offsets the HMRC tax handouts up
to £1,000 per annum for those contributing £4,000. The
only exemption is a serious ill heath exemption; very new
to ISA providers but one that pension providers are fully
familiar with - another complexity for ISA claims teams.
However, on death of the holder the recipient’s spouse
could have their annual ISA allowance increased by
the amount of the LISA including HMRC handouts. Not
as wide as pension eligible beneficiaries but a first cut
in a conservative ideology of handing on wealth; once
transferred to another account the ISA will be subject
to Inheritance Tax. An FCA concern is that savers may
not understand that the 25% tax on exit applies to the
whole value of LISA if they do not qualify for a first time
purchase, retirement at 60, or earlier death.
Providers such as A.J. Bell have stated that they will
delay any launch of LISA until they have finalised the risk
warnings to customers. Investors cashing in early before
age 60 will also have to address an additional 5% tax on
the accumulated fund. I mentioned system complexities
earlier in the article. HMRC is looking for real time
information (RTI) in relation to LISA subscriptions. This
is a huge systems upgrade from the usually manual
Magnetic Media Returns; another complexity for
providers.
On the plus side the Government has agreed that there
will be no exit penalties in the first Year of LISA; I have
not been able to find a definitive response to transfers
into LISA. A bonus is that HMRC will pay the full 25%
up to £4,000 during the financial year 2017/18 no matter
when the amounts up to £4,000 are paid. In 2018 it is
looking to a monthly addition of 25% to contributions
based on each subscription date up to that maximum of
£4,000 - another test for providers.
This is great news for savers as it will allow savers
to benefit from the incentive during the year; it is a
savings maxim to re-invest dividends and the same for
HMRC bonuses. Also there is good news that the LISA
counts for the new £20,000 limit per person on ISA
subscriptions. So, what sort of investments can a LISA
invest in? Cash with a licensed deposit taker such as a
bank or building society; stocks and shares including
eligible funds - most pundits would say the best option
for longer term investing as you are subject to market
rises and falls.
So is the LISA a stalking horse for pension tax relief
reform? Not currently unless Spreadsheet Phil has an
injection of GO; the LISA is likely to be slow burn. There
is no doubt that a number of organisations such as
the champions of ISA’s – The Tax Incentivised Savings
Association (TISA) – are committed to pension tax
reform and the promotion of ISAs over pensions, which
is indeed good news for a government looking to save
money on retirement tax relief. However, George had a
go at a stalking horse for pension tax relief reform and
even he retreated.
We play with tax relief’s on pensions at our peril. I don’t
disagree that a more balanced distribution is more
equitable across the whole population, but high earners
are well disgruntled. They pay their taxes yet may be
pegged back on relief’s. That is not equitable either.
The arguments for post taxed savings and pre-taxed
savings will continue. That is for sure!
