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Osborne unveils 'Lifetime ISAs' for 'next generation'

In his Budget the chancellor announced that 'Lifetime ISAs' will be available to the young to help them save.

 

by Michelle McGagh on Mar 16, 2016 at 13:59

Osborne unveils 'Lifetime ISAs' for 'next generation'

A new ‘Lifetime ISA’ will be introduced next April that will allow young people to save for a home and a pension in one place.

Despite chancellor George Osborne confirming he would not tackle pension tax relief pre-Budget, the introduction of a new type of individual savings account (ISA) for the under-40s came as a surprise.

In his eighth Budget, Osborne said younger people would no longer have to choose between ‘saving for your first home or saving for your retirement’ as he unveiled the lifetime ISA, already being dubbed 'Lisa'.

Savers aged 18 to 40 will be able to save up to £4,000 a year in the new ISA and the government will top it up with a 25% bonus – so for every £4 saved the government will give you £1.

Savings in the Lisa will count towards the total ISA allowance each person has, which will increase from £15,240 to £20,000 from April 2017. Meaning if you save £4,000 in a Lisa, you can still contribute £16,000 into other ISAs.

The money saved can be used to save for a first home worth up to £450,000. As the Lisas are linked to individuals not a particular property, two people buying a home together can each benefit from Lisa.

The Lisa supersedes the Help to Buy ISA that was brought in last year, and savings made into the previous scheme will be able to be rolled into the Lisa or an individual can continue to save into both, although you will only be able to use the bonus from one to buy a house.

Retirement options

However, the ‘cradle to grave’ account can also be used as an alternative, more flexible way to save for retirement.

Individuals can continue to receive the 25% bonus on any money they save until age 50 and after the age of 60 the money can be taken out tax-free.

However, if you withdraw the money at any time before you turn 60, unless to buy a home, the government bonus will be lost, including any interest or growth on the bonus. You will also have to pay a 5% charge for accessing the money early.

The fact that savings can only be accessed tax-free at age 60, or to buy a house, gives an indication of the government’s intentions when it comes to accessing long-term savings. Currently, pensions can be accessed at age 55, and this will increase to 57 by 2028 but those saving into a Lisa will only be able to get their tax-free money at age 60.

Osborne said the Lisa bonus was ‘the equivalent of tax-free savings into a pension, and unlike a pension you won’t pay tax when you come to take your money out in retirement’.

‘For the self-employed, it’s the kind of support they simply cannot get from the pensions system today,’ he said. ‘Unlike a pension you can access your money anytime without the bonus and with a small charge.’

Osborne added that the government would consult on whether Britain should follow the American model and allow savers to return money to the account once they had taken it out in order to reclaim the bonus.

‘And we’re going to consult with the industry on whether, like the American 401K, you can return money to the account to reclaim the bonus – so it is bonus generous and completely flexible,’ he said.

Appealing for young savers

Last week it was reported that the Treasury was considering ‘Lifetime ISAs’ as a ‘cradle to the grave’ method of helping people to save.

The chancellor was said to be wanting to make progress helping those who had lost out because of low interest rates.

The plan was originally proposed by the libertarian think-tank Centre for Policy Studies, whose research fellow Michael Johnson had been pressuring the government to introduce ‘Pension ISAs’ to reform pension tax relief.

The Lisa can be invested in stocks and shares and insurer Partnership calculated it could be worth as much as £600,000 if a person starts saving at age 18.

‘An 18-year-old who opens one of these and contributes the maximum - £5,000 including government bonus – could have a fund of £375,000 at age 50,’ said Mark Stopard of Partnership.

‘This clearly shows the power of starting to save early and is a step forward when it comes to engaging with the younger generation and incentivising their retirement saving – especially as it can be accessed to fund the purchase of a first home. Should they leave their Lisa invested until they reach 60 – as per the rules – they may find they have a pot of around £600,000 (assuming 5% investment return).’

However, he noted if they accessed the money before age 60 they would lose 25% of the sum plus a 5% early access charge.

The focus on long-term savings through ISA was bad news for traditional pensions, said Andy Cumming of Close Brothers Asset Management.

‘The chancellor has dispelled fears that long-term savers were in for a rough ride from this year’s Budget… ISA limits are leaping, and the new Lisa will provide younger generations with a completely new savings vehicle,’ he said.

Phil Wadsworth of JLT Employee Benefits questioned whether pensions would be overtaken by the ‘new attractive ISAs’.

‘Getting £1 for every four is a straightforward incentive to save,’ he said. ‘Coincidentally, it is the equivalent of pension tax relief for a basic rate taxpayer. The fact the Lisas are much more flexible means younger people will likely find it more attractive than pension savings.’

11 comments so far. Why not have your say?

Micawber

Mar 16, 2016 at 14:53

The LIfetime ISA looks to be an excellent vehicle for parents to gift their young adult offspring PET sums for annual savings where the offspring are disincentivised from raiding the account other than for house purchase or retirement. Note that the account holder loses the 25% bonus if withdrawn before age 60 repeat 60 other than for house purchase.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/508117/Lifetime_ISA_explained.pdf

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Redundant (Old Timer?)

Mar 16, 2016 at 15:25

Interesting to see if the young opt out of auto enrolment to do this, thus losing employer contribution and tax relief there, or try to do both. The Media will need to carefully explain to the young how to maximise their future using a combination of auto-enrolment and Lisa.

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Jonathan

Mar 16, 2016 at 16:30

It seems a bit unfair that it's only people under 40 that can start this. There are plenty of people over 40 who would benefit from one of these who could do with saving more into their pension.

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PaulSh

Mar 16, 2016 at 16:44

"Should they leave their Lisa invested until they reach 60 – as per the rules – they may find they have a pot of around £600,000 (assuming 5% investment return)."

By my calculations, that works out to an annual charge of around 0.65%, which doesn't sound much but actually compounds to well over £100,000 over the total lifetime of the account. A nice little earner for a company that basically does nothing but hand someone's money over to someone else for 40 years at no risk to itself.

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Steven22

Mar 16, 2016 at 18:10

The restriction of the account (age group, house purchase only until 60) means that is another George attempt to manipulate (sorry...'help') the house market. So that is around £32k over 32 years (or £64k for a couple) of tax payer subsidy to buoy the already very expensive housing market. Leverage that £64k out on a 75 LTV, that would increase the maximum bid of £256k (though in most cases people won't really wait until 50), so perhaps a little less.

I would be under 40 by April 2017 but I don't fancy paying ten of thousand pounds more for a house because of this 'subsidy'.

And Oh... say there are 10 million of such account, that is £1bn worth of subsidy. Only George can come up with such a cynical idea.

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Mike Rose

Mar 16, 2016 at 22:58

Jonathan, yep, agree. Oldies dont appear to be anywhere on Osbornes radar. No attempt to mitigate the falling (and appalling) interest rates on savings, no attempt to rectify the proposed unfair discrimination against childless people re IHT. I also object to topping up other peoples savings while my own life style deteriorates due to pathetic interst income

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Jeff Liddiard

Mar 17, 2016 at 09:04

How can the LISA be 'Cradle to Grave' when you can't start it until you are 18? it would have been cradle to grave if a parent or grandparent could contribute for a child before the age of 18.

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Steven22

Mar 17, 2016 at 09:16

@Steven22 (to myself, can't edit) Sorry... 10 million account would cost £10bn pa (not £1bn) (1000 x 1m = £1bn, 1000 x 10m = £10bn pa).

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JohnM

Mar 17, 2016 at 12:20

Isn't this potentially illegal, in that I thought there was age discrimination laws out there? Or are, as per normal, the government exempt from following their own laws?

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Mark Stringer

Mar 17, 2016 at 12:47

On most of these "giveaways" there seems to be a limitation element fortunately for the taxpayer.

Still the sound of the deficit being kicked further and further down the political road (just after Gideon Osbourne hopes he will be an ex-pm I bet) could be heard loud and clear.

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markus

Mar 17, 2016 at 22:40

Would be interested to see how they are going to calculate the "growth" attributable to the bonus element that would need to be taken away if you need to trigger an ad-hoc withdrawal

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