“Put the Next Generation First”
George Osborne - 16th March 2016
Alongside a welcome announcement that ISA limits will increase to £20,000 from April 2017, the introduction of a “Lifetime ISA” was one of several headline incentives in this year’s Budget, all designed with long term planning in mind.
Initially, all the sound bites are very appealing:
“Tax free Access!”
“A flexible pot to help with buying a home and for your retirement!”
Let’s take a closer look…
From 2017, anyone aged 18 - 40 will be able to open a Lifetime ISA and save up to £4,000 a year. This Lifetime ISA will sit within the overall £20,000 ISA contribution limit.
Any money saved before your 50th birthday into a Lifetime ISA will benefit from a 25% bonus from the Government (i.e. for every £4 saved, you will earn an extra £1 from the Government - up to a maximum bonus of £1,000 per annum).
The Lifetime ISA holds two key purposes which we explore in detail:
- To help first time buyers purchase their new home
An individual’s savings along with the 25% Government bonus can be used towards a deposit for a home worth up to £450,000. This appears very similar to the existing Help to Buy ISA already in place, with some slight benefits.
- To assist with retirement plans
Any monies built up within the Lifetime ISA will be accessible tax free from the age of 60.
It seems that by adding in a “retirement element”, the existing Help to Buy ISA has simply been re-worked into a “Help to Buy and Save for Retirement Scheme”. In reality however, a one-size-fits-all approach aimed at helping the next generation through a combination of first home buying and retirement planning does have its drawbacks.
A Closer Look – Help for First Time Home Buyers
The good news is this will be available per person (not per property), meaning joint purchasers can save up their own individual “pots” and combine them for greater purchasing power. Any savings already within a Help to Buy ISA can also be transferred into the new Lifetime ISA, offering those already in a Help to Buy scheme the chance to ‘hop onto a new ladder’. Many first home buyers will however feel disappointed in the fact that not enough is being done to really support them, given the lack of affordable homes, rising property prices and no announcement in this year’s Budget of any significant increase in public spending on new homes.
A Closer Look – Retirement Planning Incentives
This intends to encourage saving for later life, however when considering the finer detail and alternatives such as pensions and traditional ISAs, important considerations need to be taken into account.
- Contributions into the Lifetime ISAs will be made from already taxed income and will not receive any tax relief, unlike pension contributions (20% for Basic Rate Tax Payers & 40% for Higher Rate Tax Payers).
- Access to the monies if used for retirement, will only be available at age 60, without penalties. The current minimum age at which a pension can be accessed is age 55, with traditional ISAs accessible at any stage.
- Access to monies before age 60 other than for a first home with the Lifetime ISA is possible, but the Government bonus (as well as any interest or growth on the bonus), will be returned to the Government and a 5% charge applied.
Summing Up Right Now
Lifetime ISAs seem to be restrictive and potentially costly for those not fully understanding the implications of withdrawing money for reasons other than buying a first time property - for example other significant life events such as marriage, raising a family, or in the event of an emergency.
Such a product may also tempt some savers away from pensions. The risk here is that they may stop contributing to their employer’s pension scheme, thereby losing out on valuable employer contributions.
This all seems to contradict recent efforts made by the Government to engage with employers and employees through Auto Enrolment, make pensions more accessible and offer greater tax efficient legacy planning opportunities.
The Government has confirmed that further changes and details regarding the rules and regulations of the Lifetime ISA will be announced ahead of its launch in April 2017 and after it has engaged in depth with the industry.
There’s no doubt it’s positive that the Government is attempting to engage with the next generation to address the serious issues younger people face in saving for a first home and for retirement. The restrictions and inflexibility of the Lifetime ISA however, clearly show that this could only ever form part of the solution and may not be appropriate for everyone.
The introduction of a Lifetime ISA as an option for financial growth, also highlights the importance of:
- Keeping a watchful eye and good Financial Planning / Advice
- Exploring and understanding the options available, as they change or emerge
- Defining a Wealth Strategy to meet your specific goals and objectives.
With the message clearly being to “put the next generation first”, COURTIERS continues to see the next generation as a fundamental aspect of any effective Wealth Management Strategy.
If you’d like any further information, or to discuss your financial goals and circumstances, please speak with your COURTIERS Adviser or contact us.
Sagar Dholiwar BA (Hons), APFS
Chartered Financial Planner
"Tax treatment depends on individual circumstances and is subject to change"
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