Autumn Statement: Focus on ISAs puts long-term pension saving at risk, says expert

Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law.com, was commenting as the government began a consultation on reducing the annual tax-free allowance on new contributions into pensions that are already in draw-down from £10,000 to £4,000 from April 2017.

The change, announced by Philip Hammond as part of the Autumn Statement, will "prevent inappropriate double tax relief", the chancellor said. The maximum that an individual will be able to save into ISAs in any one tax year will be increased from £15,240 to £20,000 in April, he said.

"The reduction of the money purchase annual allowance comes in the context of the government's expressed desire to offer scope to those who have accessed their savings and need to rebuild them," Saunders said. "However, it is concerning that the consultation on this topic justifies the reduced allowance, in part, on the basis of individuals being able to contribute to an ISA instead as a way of rebuilding their savings."

"ISAs are not a substitute for pension savings. And the more we conflate the two, the less likely we are to engender a real culture of long-term pensions saving," she said.

A new 'lifetime ISA' (LISA) will be introduced in April, giving those aged between 18 and 40 a new way to save towards the purchase of their first home or for their retirement. Up to £4,000 may be saved into a LISA annually, and will be topped up with a 25% bonus from the government provided that the product is used for one of the two stated purposes.

Pensions and lifetime savings expert Tom Barton of Pinsent Masons said that it would be up to consumers and product providers to "dictate whether [the LISA] will be a success".

"The real concern with the LISA is that it takes money out of the pension savings system and focusses on the more immediate savings needs of those looking to get on the property ladder," he said. "Mixing property and pensions may not be a happy economic experiment long term."

"The introduction of the LISA will also raise questions about whether there remains a policy intention to switch pensions to a [tax-exempt-exempt] tax system at some point too. We can probably infer that the present government does not want to rule it out," he said.

'Tax-exempt-exempt' (TEE) refers to the ISA-style tax model, in which savings are made from taxable income but then returns and withdrawals are tax exempt. This distinguishes it from the 'exempt-exempt-taxed' (EET) model that applies to pensions, where saving into the pension and investment returns are tax free and the actual pension income is taxed.

The government's consultation on reducing the money purchase annual allowance closes on 15 February 2017.