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Introduction to the Lifetime ISA

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George Osborne announced in the 2016 Budget that a new Lifetime ISA will be introduced in April 2017. The new ISA, available to those aged between 18 and 40, enables the account holder to save up to £4,000 each year and receive a government bonus of 25% on whatever has been saved.

The savings can be withdrawn, tax-free, for use against a first-time property purchase, or for retirement after the age of 60. Money can be accessed before either of these milestones, but the catch is that the government bonus will be disregarded and a withdrawal fee of 5% will be charged on savings accrued.

Those already holding a Help to Buy ISA can transfer savings from this account into a Lifetime ISA, or run the two accounts separately. The £450,000 property limit with the Lifetime ISA is attractive to some, compared to the £250,000 limit with the Help to Buy ISA, and the Lifetime ISA can essentially be topped-up after purchasing a first property and used towards retirement.

Over complication of ISA products

However, despite being warmly accepted by many, some argue that George Osborne’s new ISA has over-complicated what’s already available. Andy Bell, chief executive of AJ Bell, states, “What George Osborne has done is make ISAs more complex. There is a danger of us ending up with a spaghetti soup of ISA products.”

The ISA provides huge benefit for young savers, usually keen to get a foot on the property ladder, as it essentially promotes a 25% interest rate on their savings which is extremely attractive. Jonathan Watts-Lay, director of financial education provider Wealth, comments that young people “no longer have to choose between saving for their first home or retirement. I’ll be encouraging all young people to use it, including my children. If a 25% interest rate can’t get young people saving, then I’m not sure what will.”

However, head of retirement policy at Hargreaves Lansdown, Tom McPhail, errs on the side of caution with Bell, suggesting that the “government needs to make sure that the implementation of the Lifetime ISA does not add too much complication to the system. One of the keystones of the success of ISAs has been their simplicity, and consumers won’t want to see this change.”

With many of those under 40 having already started pension saving schemes, the birth of this new ISA has got heads spinning and many are confused as to what is the best option for their future after settling with products that they were confident and au fait with.

Is the Lifetime ISA really for the under-40s?

Critics believe that very few people will use the Lifetime ISA to save for retirement, championing pension saving schemes to be the best option for later life. Adrian Walker, retirement planning expert at Old Mutual Wealth, comments: “The Lifetime ISA is a gimmick that will only appeal to younger savers looking for help getting on the housing ladder.” It is widely argued that this ISA will be a popular way for parents to help their children purchase a property, help that they potentially may have given them anyway, but with an appetising government incentive on top.

David Hearne, chartered financial planner at Satis Asset Management, puts forward the argument that the Lifetime ISA will boost the demand side rather than the supply side of the property market. He explains, “With the Lifetime ISA the government is still incentivising (via other people’s taxes) some people to buy houses. This gives an unneeded boost to the demand side of the property market, when it is the supply side that requires support.”

There is a further issue for those looking to buy homes in London using the new ISA. With Rightmove releasing its house price index for 2016, figures for April show the average property price in London is £646,200. Given the £450,000 property spend limit for first-time buyers with the Lifetime ISA, those looking to settle in the capital will struggle to benefit from Osborne’s scheme, with areas such as Croydon and Dagenham being two of a handful of options achievable with the ISA.

Issues with auto-enrolment

Some argue there is a clash between workplace pension auto-enrolment and the Lifetime ISA. The UK has made significant progress in ensuring that young workers have savings for retirement but the introduction of Osborne’s new initiative could dent the headway which has already been made for the younger generation.

The confusion caused by the introduction of the ISA is a concern voiced by Brian Smyth, head of Ascot Lloyd Benefit Solutions. He comments, “Our main concern is that employees we would expect to be automatically enrolled into pension saving in their early 20s will now be faced with a conflict between conventional pension provision and this new vehicle, which attracts no employer contributions.”

The obvious benefit of the ISA being a tax-free option for savers could be an issue in the long-term for pension contributions. The amount young adults can save varies from month to month and is completely dependent on circumstances in that present moment, with many living pay check to pay check and scraping any remaining pounds into a general savings account.

Founder of Pensionschamp, Alan Highman, understands this concern: “The Lifetime ISA will compete for scarce savings resources for the under 40s. It remains to be seen how many people prefer to save in the Lifetime ISA versus a pension. It could affect opt-out rates from workplace pensions.”

The carrot of the 25% savings uplift by the government to grasp onto a rung of the housing ladder is likely to become irresistible to under-40s and many may feel a pressure or sway towards opting out of auto-enrolled employer pensions in favour of the Lifetime ISA.

Furthermore, relatively abandoned by the private pension system, those who are self-employed may find solace in the Lifetime ISA. With only 10% of self-employed individuals saving for retirement in a pension, the new scheme could prove attractive to those unsure of how to begin saving for their futures.

Given the seemingly unintentional lean towards the Lifetime ISA benefitting under-40s, it could foreshadow the government revisiting the issue of tax relief on pensions. In this same vein, the younger generation will have to place faith in the hands of future governments not to default on the promise of the bonus at the age of 60 stated by the chancellor.

David Hearne comments that the Lifetime ISA “appears to be a toe in the water of future pension changes, but trying to anticipate the direction of future policy makes planning now harder.” Therefore, it could be suggested that the introduction of the Lifetime ISA could be a catalyst for future changes, with Jason Hollands, managing director at Tilney Bestinvest, commenting that “here remains the possibility of a much more rapid return to a full-frontal assault on upfront tax relief on pensions, given talk of a £50 billion hole in the chancellor’s projections for achieving a budget surplus by the end of the parliament – so the future of tax relief on pensions could be back on the table once the small matter of the Brexit referendum is out of the way.”

Bear in mind

Wellesley Property Bond

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