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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
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.
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.’
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