Lifetime ISA pitched to resolve UK pension crisis

An academic has claimed that a new ‘lifetime ISA’ could help to prevent a capital crisis in the UK.

As the population age and birth rates decline across many developed economies, governments are increasingly trying to determine new ways to support a rising population of elderly citizens. But with a pensions crisis potentially on the horizon, one academic has pitched a novel and highly radical new idea to the government.

Michael Johnson is a research fellow at the Centre for Policy Studies, and he has put together proposals to transform the short-term individual savings account (ISA) into a new, longer-term product that encourages younger people to save more for retirement.

This pensions plan would mean merging the new cash and stocks and shares ISAs into a single “lifetime ISA”. Junior ISAs would be folded into the same account.

Whenever a baby’s name is registered, the plans would see a lifetime ISA automatically set up for them with a provider of the parents’ choice, and a new system would replace the existing tax reliefs on pensions.

For every £1 added to the ISA up to £8,000 per year, the government would also contribute 50p, regardless of the tax status of the payer. If the taxpayer pays in the maximum of £8,000 per year, they then have £12,000 per year in total, which Mr Johnson believes is enough for 90 per cent of the population.

Anyone wishing to withdraw savings before retirement would only be able to withdraw their original contributions, and would have to pay the Treasury back any contributions it had paid on those funds. After retirement, they would pay tax at the saver’s marginal income tax rate.

In his paper, Mr Johnson explains that the intention is to develop a culture focused on “lifetime savings”, rather than traditional pensions, which encourages people to think of saving for retirement in the same way they consider their existing short-term savings goals. Younger millennial workers are a particular target.

“I am trying to crack a problem I think people have tussled with for years: how do you provide an incentive to save and provide ready access to funds?” he told the Financial Times.

“I am fed up with Generation Y saying they have no interest in pensions. I am trying to shake up an industry that is now past its sell-by date.”

Even if the plans are not adopted – and it seems unlikely that such a major shake-up would be introduced in the wake of the ISA changes set out in the Budget and auto-enrolment – it contributes to the ongoing debate about how to meet the growing pension needs of the UK population. Savers and governments alike can acknowledge that puzzle must be solved sooner rather than later.