The future launch of the Lifetime ISA was perhaps the most significant announcement made in the March 2016 Budget. Now we have more detail about the product, some experts suggest that many 20 and 30-something taxpayers will turn their backs on the traditional pension as a way to save for retirement.
Just like a pension, the Lifetime ISA will give savers a government top-up of 25% of the amount invested and the money in the savings pot will not be subject to income tax.
Key differences are that savers will eventually be able to withdraw all the funds tax free, rather than the 25% you can take tax free from a pension fund. You’ll need to be patient though, as you can’t access your money until you are 60. For a pension, the minimum access age is set to rise from 55 to 57 by April 2028.
You can, however, access the ISA earlier for the purchase of a first home up to £450,000. But there is a price to pay. If you wish to access the money, you will lose the government top-up, any accrued income associated with it and a 5% penalty. At present, the government is considering whether it should be possible to withdraw Lifetime ISA funds plus the government bonus for other specific life events.
All that said, pensions still have a lot going for them if you are a higher rate taxpayer. The government top-up for a 40% taxpayer is effectively 67%. That means £6,000 of pension contributions after full tax relief provides investments of £10,000.
The biggest constraint in the Lifetime ISA will be its £4,000 annual investment limit. Basic rate taxpayers who can afford to save more than this could adopt a strategy of utilising their Lifetime ISA allowance first and then saving into a pension.
In the case of a couple using the Lifetime ISA to save together for a house purchase, both parties can each use a Lifetime ISA to accumulate funds.
The Lifetime ISA scheme is not due to start until 6 April 2017 and will be open to any adult under 40 from that date. If you qualify, you can continue to save up to £4,000 each year and will receive a 25% bonus on the contributions you make up to the age of 50. Which is a shame if your 40th birthday is on the 6th April 2017.
If you would like to know more, please speak to your RfM advisor who can refer you to one of our recommended financial services providers or enquire here.