Budget 2016: Lifetime Isa to help younger people save for property and retirement
Chancellor George Osborne has announced the launch of a new ‘lifetime individual savings account (Isa)’ to encourage young people to save for both their first home and their retirement.
The new deal will be available from April 2017 to anyone aged between 18 and 40. It will allow them to save up to £4,000 a year and get a bonus of 25%, worth up to £1,000, payable at the end of each tax year.
The money can be used to help savers buy their first home, or it can be kept until they are 60.
According to figures from the Treasury, savers will be able to put away contributions worth £128,000 over the life of the account and receive a maximum bonus from the government of £32,000.
As with the Isa, savers will be able to choose between cash or equity accounts.
Savers wanting to use the lifetime Isa to buy their first home will be able to put the money towards a deposit on any property worth up to £450,000 and two people can use two lifetime Isas to buy one property, making it easier for couples to take their first step on the property ladder.
Savers with help to buy Isas will be able to roll those savings into the lifetime Isa from April. Alternatively they will be able to pay into both, but only use the bonus from one to buy a property.
Savers that choose to use all or some of their lifetime Isa to help fund retirement will be able to access their pot tax-free after their 60th birthday. It will be possible to access savings before this date but savers doing so will lose the government bonus (including interest or growth on this amount) and pay a 5% charge.
Additionally while the new account is designed to encourage savers to put money away for their retirement, savers will only be able to pay contributions into the account and receive government bonuses up until the age of 50.
Another catch is that this lifetime Isa is not available in addition to the Isa allowance. However, George Osborne did also announce that the overall Isa allowance would rise from £15,240 a year to £20,000 next April.
FOR: Richard Parkin, head of pensions at Fidelity International says: “We welcome any change that encourages and incentivises saving for the longer term – particularly those in the younger age group who are facing real struggles between saving for a pension and saving to get on the property ladder. The lifetime Isa straddles that idea well and with flexibility on access, it will increase the appeal of longer term saving to younger generations.”
AGAINST: Steve Webb, director of policy at Royal London and former pensions minister says: "Just at the point that millions of under forties have started pension saving for the first time, the Chancellor has set up a rival product which risks causing mass confusion.
"Young savers who opt out of pensions in favour of a lifetime Isa lose the contribution from their employer and the chance to build a tax-free lump sum from a pension pot - how will they know which is right for them?
"Young workers have had some of the lowest opt-out rates when they have been enrolled into workplace pensions, yet the Chancellor's desire for a shiny new initiative could undermine the huge progress which has just been made in ensuring young workers have savings for retirement.”
There are already 5 types of Isas
Cash Isa: suitable for someone saving up for an emergency cash fund or if you have a financial goal that is less than five years away.
Help to Buy Isa: a must if you are a first time buyer saving up for a deposit.
Stocks and shares Isa: suitable if you are investing for a financial goal at least five years away
Innovative Finance Isa: coming on 6 April and will allow investors to access higher returns than cash via peer-to-peer lending.
Tax-free lump sum
An inelegant phrase that is nonetheless accurate in what it describes: a one-off payment to a beneficiary that is free of any form of taxation. Usually received when using a pension fund to purchase an annuity, as 25% of the overall fund can be taken as a tax-free lump sum.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.