George Osborne labelled his Budget this week as one that “puts the next generation first”, and one of the biggest announcements to this effect was his plan to introduce a “Lifetime ISA” from April 2017 onwards. The account will be available to anybody aged between 18 and 40 and will offer a 25% bonus from the Government.
You will be able to save a maximum of £4,000 per year (equating to a maximum of a £1,000 top-up from the Government) with the option to hold either cash or investments within the account, much like a standard ISA. Contributions can continue until the holder reaches age 50 with the bonus being added at the end of each year. Existing Help-to-Buy ISAs can also be rolled up into the new Lifetime ISA or retained separately, but you will only be able to claim the bonus on one of these accounts.
Now, for those of us who weren’t lucky enough to be around for the release of The Eagle’s excellent single “Hotel California” or to see the original Star Wars film at the cinema in 1977, this sounds like a fantastic deal – 25% added onto your savings each year, thanks Mr Osborne!
So, what’s the catch…?
Well, any funds held within the Lifetime ISA can only be withdrawn without penalty if they are put towards the deposit for your first home (provided it is worth less than £450,000) or if they are held until age 60. Should you wish to use your savings for any other reasons, then Mr Tax Man will take back the 25% he so generously added on the way in (as well as any growth or interest you’ve received on it) and you will also be subject to a 5% penalty.
Ouch, maybe this isn’t such a great deal after all?
Ultimately the Lifetime ISA will be a brand new savings vehicle that will certainly provide some useful benefits to specific groups of savers. The ability to obtain this 25% uplift on up to £4,000 per year and take tax free withdrawals is not to be overlooked, particularly for first time buyers desperately reaching for that infamous first step of the property ladder. However, the lack of flexibility available when withdrawing your funds for any other reason before age 60 means that this ISA will create a peculiar overlap with pension plans, which also offer tax relief on contributions at your marginal rate of income tax and can currently be withdrawn at any point after age 55 (rising to 58 in line with the state pension age by 2046).
Given that we will soon all be part of a workplace pension, with contributions being paid by employers as well as employees, the introduction of the Lifetime ISA does pose some tricky questions. Which route is more tax efficient? What plan should I pay into to maximise my income later in life? What if I did see the original Star Wars at the cinema when it was first released?
Ah, well the first two questions will require some careful planning to make sure you are picking the most appropriate option for your personal circumstances, which is where we can help. As for the final question, to paraphrase the late, great Sir Alec Guinness as Obi-Wan Kenobi “This isn’t the savings vehicle you are looking for.”