George Osborne announced his eighth Budget today, introducing the Conservative’s economic plans for the year ahead. Alongside a sugar levy on soft drinks, a further increase to the personal income tax allowance and on-going cuts to public spending, this year’s ‘white rabbit’ was the announcement of the new Lifetime ISA.
Osborne said “far too many young people in their 20s and 30s have no pension and few savings”, and he wants to change that by introducing “a completely new flexible way for the next generation to save”.
So, from April 2017, people between the age of 18 and 40 can open a Lifetime ISA and receive £1 for every £4 saved – a bonus of 25% from the Government. Lifetime ISA savings must be used to pay for either a first home or retirement. There’ll be further consultation before next April in order to finalise plans with providers, but certain details have already been announced.
The Lifetime ISA could benefit people saving for a home deposit, thanks to the incentive it offers; those who can afford to save will be greatly rewarded for doing so.
What you need to know
- Lifetime ISAs can be opened by anyone between the ages of 18 and 40.
- For every £4 saved before your 50th birthday, the Government will gift you a bonus of £1.
- The most you can deposit each year is £4,000, but there’s no maximum monthly deposit. If you have a windfall one month, you can deposit as much as you like up to the annual limit.
- £1,000 is the maximum annual bonus.
- Your Lifetime ISA can be used for the purchase of a first home (similar to the Help-to-Buy ISA), or taken as a tax-free lump sum after your 60th
- The annual ISA allowance will also increase, from £15,240 to £20,000
Saving for a first home
Introduced in late 2015, the Help-to-Buy ISA awards a 25% Government bonus up to £3,000 when you save towards a deposit on your first home.
And this generosity will be extended further from next April because, as far as we’re aware, there’ll be no bonus cap on the Lifetime ISA. Your savings and the bonus can be used towards a deposit on any first home purchase (maximum property value of £450,000).
You could even transfer your current Help-to-Buy ISA savings into a Lifetime ISA if you wish, but although you can save into both a Lifetime ISA and a Help-to-Buy ISA at the same time, you can only receive the Government bonus on one of these products. With the details we know so far, it seems the Lifetime ISAs flexible saving rules make it easier to achieve the Government bonus.
The Help-to-Buy ISA allows an initial savings deposit of £1,200 but only a maximum of £200 each following month. To get the total £3,000 Help-To-Buy bonus, you’d need to save £12,000 – which would take you four and a half years (55 months) minimum.
With maximum contributions to the Lifetime ISA, you’ll reach this same £3,000 bonus in your third year of saving – so you could have a £15,000 deposit by April 2020.
And, like the Help-to-Buy ISA, accounts are limited to one per person, not one per home. If you intend to buy with a partner or friend, you can both have a Lifetime ISA and receive the bonus from the Government.
Saving for retirement
If you don’t intend to use the Lifetime ISA to purchase a home it can be used to build a nest-egg for your retirement, either alongside, or as an alternative to a private pension.
On your 60th birthday you’re able to take the whole amount – including the 25% bonus and any interest accrued – as a tax-free lump sum.
You can continue saving into the Lifetime ISA indefinitely – but you’ll only receive a bonus on funds saved in the account up to your 50th birthday. And while you can access your money at any time, if you take any amount as a lump sum before your 60th birthday you’ll be charged a 5% withdrawal fee and lose the 25% Government bonus.
Ahead of the introduction
The Lifetime ISA could benefit people saving for a home deposit, thanks to the incentive it offers. Those who can afford to save will be greatly rewarded for doing so.
Whether the uptake is as great for retirement savings is yet to be seen, as it requires more responsibility from the individual than auto-enrolment does; without knowing the interest rates that will be offered on these accounts, it’s difficult to make a prediction. We likely won’t see ISA providers confirming their interest rates until closer to April 2017, but unfortunately, ISA rates are low across the board – the more financially-savvy may still look to save for their future elsewhere, especially due to the penalties for accessing money early.
We’d like to see an option to take money out without penalty if needed, even if this meant losing the Government bonus on that withdrawal.
At first glance, the Lifetime ISA seems like a great product if you can take advantage of it, and with the increase in the annual ISA allowance to £20,000, there’ll be even less tax to pay on savings.
It’ll be interesting to see if any additional caveats are introduced before next April, and how well the ISAs are received by the general public. As more details emerge over the next 12 months, and as economists have chance to digest the announcement we’ll have a clearer vision of exactly how this will impact UK savings.
*Image credit: Lee Davy