Budget 2016: Chancellor offers young savers £1000 annual boost in new Lifetime ISA has been saved
Budget 2016: Chancellor offers young savers £1000 annual boost in new Lifetime ISA
17 March 2016
Adam Sheffield, senior tax manager at Deloitte, comments on the new Lifetime ISA:
“The plans for a new Lifetime ISA announced yesterday may have come as a surprise to those expecting a retreat from the Pensions ISA trailed earlier in the month. In all but name the Lifetime ISA resembles the plans to offer young savers a simple alternative to conventional pensions, with the headline advantage being a 25% bonus paid on up to £4,000 of contributions each year. The Lifetime ISA slots into the existing suite of ISA products, with the same tax free growth and tax free withdrawal features, and contributions count in part towards the newly extended £20,000 annual ISA limit.
“Whilst moves to engage with young savers and encourage objectives such as saving towards a first home, or towards retirement, are welcome, it remains to be seen how popular the new products will be. The success of the Help to Buy: ISA may be in part due to the short horizon of savers looking to buy their first home. For those between 18 and 40 to lock savings away until they are 60, under threat of clawback charges and a 5% penalty for early withdrawals, the appeal of Lifetime ISAs may be reduced. It is hoped that the detail to be announced later this year recognises the need for flexibility in order to stop the Lifetime ISA becoming a bonus only for those who can comfortably afford to lock away surplus funds for many years.”
Who will benefit from the new Lifetime ISA?
The new ‘Lifetime ISA’ has been added to the suite of existing ISA products available to savers from 6 April 2017. Those expected to benefit under this component of the ‘Budget for the next generation’ are those between the ages of 18 and 40 who are saving for their first home, and/or for retirement. There is a significant overlap between these beneficiaries, and those who have opened over 350,000 Help to Buy ISAs since the scheme was launched, making it a success.
How will the Lifetime ISA work?
From next year, eligible savers may contribute up to £4,000 of post-tax income per annum to their new Lifetime ISA. In return, they will enjoy a bonus from the Government equal to 25% of their annual contribution, plus the tax free growth and future tax free withdrawals common to existing ISA products.
Although new accounts may only be opened up until the saver reaches the age of 40, contributions (and therefore bonuses) will continue to be available until the saver reaches the age of 50. Assuming a maximum £128,000 contribution, comprising 32 years of £4,000 per annum, the total bonus available will be £32,000. This gives a maximum total pot of £160,000 – smaller in scale than the savings possible under existing pension provisions, but still substantial.
Any savings made in a Lifetime ISA will count towards the increased £20,000 annual ISA contribution limit announced. A range of measures have also been trailed which are intended to integrate the new ISAs with existing options such as Help to Buy ISAs, and savers will be able to invest in the same range of qualifying investments as are currently permitted under the cash and stocks and shares ISA provisions.
In due course, the saver may access their Lifetime ISA funds without charge in either (or both) of the following circumstances.
Firstly, the saver may draw down their funds in order to buy their first home, under qualifying conditions in line with those announced last year in relation to the Help to Buy ISA.
The other option available is to save towards retirement, and this option seems similarly targeted at those younger savers who find their existing pension options too complex, despite the simplification drive of the past few years. The basic guidelines of the Lifetime ISA stipulate that if savings are held within the ISA until the saver reaches the age of 60, they may then draw down up to 100% of the balance free of tax charges. This is intended to offer a flexible and stripped back alternative to saving via a pension and is expected to appeal particularly to self-employed savers, but at £4,000 per annum the scope for saving is a tenth of the £40,000 pension contribution currently available.
Although the offer of a 25% bonus may be extremely appealing against a backdrop of low interest rates, prospective savers should be aware of the potentially punitive exit charges that would apply on an early withdrawal.
Notes to editors
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