Lifetime ISAs will offer flexibility and attractive benefits for people under 40 saving to buy their first home and for retirement. Here we look at what is likely to make them the savings vehicle of choice for younger people.
Data shows that there could be a healthy market for Lifetime ISAs, including among people saving for retirement. According to research conducted for the Scottish Widows Retirement Report, at least 46% of people in their thirties are saving for retirement outside their existing pension.
The typical extra amount these people are saving is £150 a month. This could already be in a current ISA and it suggests that a significant number of people could switch those savings into a new Lifetime ISA.
The new accounts, which will be available from 6 April 2017, will have a number of attractive benefits. They will allow people between the ages of 18 and 40 to save a maximum of £4,000 a year for retirement or to buy their first home.
Tax benefit and bonus – if you meet the criteria
Savers will receive an upfront tax benefit of 25% on all money they invest in a Lifetime ISA up to the age of 50, which is a bonus of £1,000 a year on the maximum investment. Withdrawals are also tax-free from age 60 and, assuming this benefit stays in place until they retire, it will give savers a valuable double tax relief boost.
Many people will also find the dual purpose of Lifetime ISAs attractive. Savers can use some or all of the money to buy their first home, although the properties they buy must cost less than £450,000, and keep the tax benefits. Or they can keep it until 60 and use it to supplement their retirement income.
Access to your money
Crucially, the money is not tied up – savers can withdraw it before they are 60, but if they do (unless it is to buy their first house or are terminally ill) they will lose the government bonus, and any interest or growth on this, and pay a 5% charge. The Government is also consulting on whether savers could withdraw the money with benefits intact for any other life events.
Incentive to keep your money invested until retirement
Ian Naismith, head of pensions development at Scottish Widows, says one of the main reasons young people do not save into a pension is their concern that they won’t be able to access their money until they reach the age of 55, or even older in the case of some people.
He added that the Lifetime ISA has a clever design in that it addresses this concern while also providing a strong incentive to keep the money until retirement.
As such, it could have broad appeal for people looking for a flexible top-up to existing pensions. However, Mr Naismith emphasised that the biggest beneficiaries would be the self-employed. “The self-employed do not currently save a lot for their retirement,” he says. “It is really important that they are given more suitable incentives and education to do that. The Lifetime ISA will help.”
Not a replacement for employers’ pension scheme
He also gave a strong warning that employees should not see the Lifetime ISA as an alternative to an employer’s pension as its benefits, especially the employer’s contributions, make them much more attractive.