All the talk before the Budget was about making pensions simpler. Despite noble intentions, what George Osborne has actually done is make Isas more complex.
Don’t get me wrong. The Lifetime Isa and, in particular, the increase in the main Isa allowance to £20,000 are positive developments for UK savers. However, there is a danger of us ending up with a spaghetti soup of Isa products.
In a way, Isas are becoming a victim of their own success. They are easy to understand, flexible and are perceived to be tax efficient. As a result, the original concept has been built on and expanded over the years and the Budget has introduced yet another new dimension.
From April 2017 savers will have the choice of a cash Isa, a stocks and shares Isa, a Junior Isa, an innovative finance Isa, a help to buy Isa or a lifetime Isa. Having multiple Isa products with lots of different rules is complex and confusing.
The big selling point of an Isa is its simplicity and there is a danger we are moving away from this. I’d like to see a single Isa product with different allowances and benefit rules depending on the savers’ circumstances.
Separate Isa products for each circumstance will just increase costs and ultimately it is savers who will pay.
It seems quite clear that the Lifetime Isa is a guinea pig sent in to trial future changes to the UK’s retirement savings framework. If the lifetime Isa proves popular, pensions tax relief will be quaking in its boots.
Whatever the future for pensions tax relief, it is essential that Isa products are not over complicated to the point that savers are put off using them. One Isa product that can adapt over a saver’s lifetime would be far preferable to a hotchpotch of Isa products, each created at a politician’s whim for the benefit of a Budget headline.
One other thing to keep an eye on will be the effect the Lifetime Isa has on the government’s auto-enrolment initiative. If it comes to a straight head-to-head choice, I predict the new kid on the block will win hands down.