The Chancellor announced a new ISA in the Budget yesterday, due to be introduced in April 2017 - the Lifetime ISA. This is targeted at helping younger people save for a first home and/ or their retirement, within the tax protection of an ISA, and with the government adding a 25% bonus.
Some immediate response suggested this may be an end to pensions for this age group 18-40, but will it?
The positives of this ISA
- ISAs are popular and probably better understood by many than pensions
- The Lifetime ISA will have flexibility for dual use: to fund a first house or save for retirement
- The government will add a 25% bonus
- Subject to a 5% penalty, or loss of the bonus, money can be withdrawn from this ISA throughout its life
The negatives when compared to a pension
- The 25% bonus effectively matches the basic rate tax relief that pension contributions currently have. It is lower than the relief that higher rate tax payers currently receive (subject to allowance limits)
- Lifetime ISAs will not have an employer contribution - workplace pensions do. This will vary between company schemes, but the minimum is 1% of relevant earnings and many employers pay much, much more
- Workplace pensions often provide wider benefits than just a pension - they can include life assurance and death in service benefits; the Lifetime ISA won't have these
- Workplace pensions will typically be arranged by employers, with terms and a range of investments relevant to their workers, and with costs at beneficial rates that may be hard for individuals to arrange on their own. These types of benefits are unlikely to be available for Lifetime ISAs
- The downside of having the flexibility to access savings in a Lifetime ISA is that this will reduce the pot being saved for retirement, and this introduces a risk of insufficient income for retirement. The inaccessibility of pension savings during the savings period provides a safeguard to this
Instead of seeing the Lifetime ISA as a challenger to pensions, it should instead be seen as an additional tax-efficient savings product. Any form of investment needs to answer questions of what objective is this trying to achieve, in what time frame and within what risk level?
The real issue when additional savings options are introduced, is that with more choice comes a greater need for understanding and guidance; the Lifetime ISA will widen these choices. Younger employees will need a lot more help to ensure they make the most of both workplace and wider savings opportunities available and make good, well-informed decisions that reflect their own circumstances, needs and objectives.
The chancellor’s budget included the announcement of a lifetime Isa to help young people save for their first home or retirement. What is a lifetime Isa? It’s a savings account that allows you to save for a property or retirement without paying tax on the interest you earn. It also offers a government bonus to boost your savings - equal to 25% of everything you save. The bonus will be added each year, so you can earn interest on it. It will be yours to keep either when you buy a property or when you reach the age of 60. The Isa will be available from April 2017.