Three steps the Chancellor should take for a simpler, fairer savings regime
With only weeks to go until Philip Hammond’s pre-Brexit Budget, attention is on where the money-hungry Chancellor will turn to bring in more tax revenue. But Mr Hammond also has the chance to offer a fresh economic vision for a newly-independent Britain. One place he should start is the simplification of savings.
The current savings landscape is a complicated mess. Individual savings accounts (Isas) have multiplied from a relatively simple, well-understood product into a thicket of options, with six different types. This creates plenty of work for personal finance journalists, but for the average saver it is confusing and discouraging – and the nation’s current low saving rate reflects that.
There is broad support for Isa simplification, although much of it has been focused on abolishing the Lifetime Isa (Lisa). In March, the Association of Accounting Technicians’ Isa working group proposed closing the Lisa and creating an “everything Isa”. In May, the Office of Tax Simplification (OTS) criticised the Lisa and stated “the range of types of Isa can be confusing”. In July, the Treasury Select Committee also called for the Lisa’s abolition.
This Friday, however, the Government responded to the Treasury Committee by saying that the Lisa was a “key part” of its commitment to savers at all income levels and life stages. With Lisa abolition off the table, what options for savings simplification are left?
As it happens, the Bright Blue think tank has just published a Lisafocused proposal from pensions expert Michael Johnson, who wrote the original policy paper which inspired the Lisa.
Mr Johnson’s new proposal is simple but powerful. Rather than seeing the Lisa’s very real problems as a reason to abandon it, he proposes three moves that will transform it into a truly universal solution.
First of all, remove the Lisa’s illconsidered withdrawal penalty. Set at 25pc, it amounts to a 6.25pc penalty on withdrawal in addition to the return of accrued bonuses. Reducing this to 20pc is enough to solve the problem.
Second, remove age restrictions. The Lisa has limited take-up for now, but it can only be opened between the ages of 18 and 40. Mr Johnson suggests allowing a Lisa to be opened at birth, and setting no upper age limit – although requiring those aged over 50 to hold an account for 10 years before withdrawal. At a stroke, this reform would allow the Lisa to replace Junior, cash, and stocks and shares Isas. Mr Johnson recommends scrapping the Innovative Finance Isa and allowing the Help to Buy Isa to expire at the end of next year as planned, turning the current jumble of six Isa products into one simple, universal, tax-protected savings account.
Third, and most ingeniously, Mr Johnson suggests allowing autoenrolment pension contributions by employees (as opposed to
As the Chancellor prepares his Budget, he should offer savers more freedom