While it is questionable whether the Treasury’s 1 May announcement of a reduction in the Lifetime Isa (isa) withdrawal charge from 25 per cent to 20 per cent was significant enough to have had many savers dancing around a maypole, a few will certainly welcome the news.
Any measure which helps some of those struggling to cope with the loss of income resulting from Covid-19 has to be good.
In reality not many savers had been making chargeable withdrawals from Lisas anyway.
The figures are probably a little higher in the case of cash Lisa, but only around 0.25 per cent of AJ Bell’s Lisa customers had requested a chargeable withdrawal between the date the reduction in the charge took effect (6 March 2020) and the date of the announcement.
It’s possible that someone who had been looking to make withdrawals had been put off by the size of the charge but, if that is the case, it’s debatable whether reducing the charge to 20 per cent will have a big impact on their decision.
The move generated some nice positive headlines for the government, but when taken across the market we’re potentially talking about a small reduction in a tax charge which, if the measure is not made permanent, might only benefit a few thousand savers.
If it is made permanent, then that would be a different matter.
What the move did do was signal at least some acceptance on the part of the government of the benefits in helping savers who are suffering financially as a result of Covid-19.
So can we expect this generosity to spread any further?
MPAA
An obvious option would be to amend the mechanics of the money purchase annual allowance (MPAA).
Readers will know this is the hidden tax trap triggered when pension savers access most types of taxable benefits from their defined contribution schemes.
So it’s not triggered by buying a standard annuity or only taking tax free cash, but comes into force if any drawdown or an Uncrystallised funds pension lump sum (UFPLS) is paid.
The impact, reducing the annual limit on pension saving from £40,000 plus carry forward to £4,000 with no carry forward, is huge.
Anyone who triggers the MPAA in their late 50s faces a period of up to 20 years where their ability to contribute to a pension is reduced by 97.5 per cent.
Some will argue that the only people affected by the reduction in the annual allowance caused by the MPAA are those who can afford to pay more than £4,000 into a pension in a year, and so unlikely to be facing a situation where they need immediate access to their pension fund.
Literally and metaphorically, I’d argue this is short-term thinking.
