Wednesday, 16 March 2016

New Lifetime ISA from April 2017

In his budget today, the Chancellor introduced a big incentive for younger people to save for the future.

With the new Lifetime ISA,(pdf link) from next April anyone between the ages of 18 and 40 yrs can save as much or as little as they wish up to a maximum of £4,000 per annum. For savings up to the age of 50 yrs, the government will add a 25% bonus i.e a max. of £1,000 at the end of each year.

Therefore someone contributing the maximum from their 18th birthday could save £128,000 by the age of 50 yrs and receive total bonuses of £32,000.

Assuming a modest return on investment of 5% and taking into account platform/fund charges of 0.5%, the pot would grow to around £350,000 by age 50 yrs and the with no further contributions, to £543,000 by the age of 60 yrs. Worth thinking about folks! (calculations via Candid Money)

The ISAs will operate similar to the existing system and individuals could have more than one Lifetime ISA - but only pay into one in any single year. They can choose between cash ISA or Stocks & Shares ISA

The money can be used towards the deposit for a first home worth up to £450,000 or can be saved as a nest egg for retirement and taken tax-free from the age of 60 yrs. Unlike pension savings, withdrawals can be taken at any time before 60 yrs subject to the loss of bonus and also a 5% charge.

A couple can each save up to £4,000 each - so £8,000 max. and get a £2,000 bonus on top.

From next April, the ISA limit - including Lifetime ISA - will rise from £15,240 to £20,000.

More details on this will emerge later in the year following industry consultations.

Thumbs up from me...what do others think - leave a comment below.

9 comments:

  1. As I see it:
    Higher rate taxpayer expecting to pay basic rate or no tax when drawing pension : this is worse than a SIPP.
    Basic rate taxpayer expecting to pay basic rate when drawing pension: this is better than a SIPP.
    Basic rate taxpayer not expecting to pay tax when drawing pension: this is worse than a SIPP.
    Anyone who hasn't already owned a house (and wants to buy one): this is fantastic.

    Rich

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    1. Rich,

      Agreed, this is probably a no-brainer for those saving for a deposit - but will it push up house prices?

      The pensions industry are concerned people will opt for the Lifetime ISA route rather than traditional pension. Although the Chancellor has ruled out the end of the tax breaks on contributions (for now), this could be the thin end of the wedge and the situation reassessed after the EU vote.

      The advantage of the new ISA is that all of the pot will be taken tax free from age 60 whereas only 25% of the pension pot is tax free and the rest is taxable.

      What about employers contribution to pensions? Those opting to save via the new ISA would lose out.

      I suspect there are quite a few angles to be explored over the coming weeks and months.

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    2. The advantage is only worth having if you were going to pay tax on your pension pot. If not it's moot; if yes then it's all about the delta between tax relief in vs marginal rate out. HR pension contributions beat the ISA because of the tax free lump sum, earlier access and the lack of age restrictions on funding.


      I'm surprised it wasn't given an 'income equality' spin. It does give basic rate taxpayers a window of advantage like higher rate earners who draw down a pension at a lower rate.

      Thirty years at 5 grand a year (with some gains) in moderate drawdown gives easily £1000 a month. Quite efficient if run alongside a pension that uses up the personal allowance.

      Regarding house prices; it's free money but not much and it takes a long time to build, like the scheme it replaces. I see it more as a sticking plaster to make sure people keep chasing the aspiration rather than an attempt to directly affect prices. For the record, I reject the aspiration.

      Rich

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    3. Quite frankly I'm almost lost for words. Yet again a Government is "fiddling around at the margins" with inconsequential headline grabbing initiatives that for the majority of people have no value and introduce a backdoor arrangement for future pension arrangements that will probably be to detriment of most people.

      I do not often get annoyed and express it in postings, but this measure is totally without merit; those who can afford it and want to be bribed in tying up there savings until age 60 (note the hint when the next change to the age you can withdraw your SIPP from is targeted at!), will benefit as it will represent a very small proportion of their income; most can not afford to tie up that much of their income/savings over their normal pensions and savings and would be better off maximising any matching from their company to their pension scheme; as to the help to buy approach, Yes could help if you can save a significant amount whilst renting (or probably living with Mum & Dad), but that is all.

      But it is not the sound basis for a tax & saving system, but a gimmick!

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    4. Interesting point Gareth.
      I didn't make a value judgement overall in my previous posts but I don't think this a bad scheme.
      It will mean many people in middle earning jobs can save money effectively from gross income to supplement their pension.
      I have friends who are teachers, council workers and non-commissioned armed forces who are unlikely to spend the majority of their career in the higher tax bracket. By being careful with this they can supplement their pensions beyond the personal allowance, tax efficiently.

      This is basically something that higher rate taxpayers could do already with an extra: a liquidity ticket for house purchasing.
      It redresses the tax fairness balance quite nicely for many people on £25k-£45k income (the lower limit is affordability).
      I'm surprised this wasn't given as a selling point.

      Hopefully this will encourage more long term saving. If not it at least provides some fairness for responsible lower income savers who don't get to use the trick of higher rate tax relief with basic rate taxation in retirement.

      I agree that if someone can't afford to save in the first place this is not the right lever to pull, but what is?


      Rich

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    5. Gareth,

      There must be thousands of young people who will be saving a deposit for their first home. If they save in the new Lifetime ISA they will get a 25% tax free bonus from the taxman. I cannot accept that all these young people will 'have no value' - seems to me they will get good value for saving and get a foot on the housing ladder that much sooner.

      I certainly wish I had received such benefits and incentives when I was saving for my first home!

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  2. Thank you for your responses.

    Maybe I did not express myself as eloquently as I could have due to my annoyance with the proposal.

    I acknowledged that it could help those that want to buy their first house, albeit at a price limit. Whether this is a good thing in the round is a matter for debate; I certainly believe this type of measure does not address the fundamental issue of affordable housing, but will help those who want to strive to buy their first house.

    As to should the government should spend my taxes on "benefits and incentives" to help people buy their first home? My answer has to be No; Yes we would all have liked it when we were all trying to buy our first house but is it really a good use of Public Finances and does it address the fundamental problem in the housing market or just exacerbate it?

    As to the benefit for those who want to build up an extra pension source, I did not say it was without merit. However, how many people are going to tie up extra amounts in savings that can not be touched until they are 60 who are under the age of 40. I am reasonably well off now but a lot of my extra disposable income to invest did not come until I was past the age of 40 and many people will be better off using their company pension schemes especially if they are getting any matching from their company scheme.

    As to encouraging long term saving, all the measures are there now, through workplace /company pensions schemes and ISAs. If you find yourself unable to access these as you have max'd out it means that you are on a significantly high income and you do not need my taxes further to help you.

    As to encouraging people to save, those who will, will do, those who won't, will not; all the evidence as to how much people can and will save on a short/medium/long term basis is currently available; I can not see how this initiative will make any significant difference to this to the key groups who need to be targeted.

    One of my key points was in respect of the age you can take the money out from the scheme other than the 1st time buyer. Age 60! My comment was is that a signal for when the age will be set for drawing out your Personal Pension etc. in future. If so even more restrictions from the government as to what you can do with your money in the future!

    So to call it a Life ISA is somewhat a misnomer I think; but hey as I see it just my rational and logical view of the proposal and probably some one else can express my views more eloquently.

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    1. Gareth,

      Thanks for expanding on your first post.

      The government are clearly concerned that not enough young people are saving. Since the downturn in 2008, household debt has continued to rise and I believe around 40% of the under 40s have no savings whatsoever.

      I believe any measures designed to encourage these people to save for deposit/old age is to be welcomed. Whether they actually DO save or whether they continue to fuel the consumer debt bonfire is another matter.

      I accept that you do not want your taxes to encourage people to save but if they end up wasting their money they are probably at high risk of relying on welfare benefits at some later date - paid for by the taxpayer.

      Finally, I think most people now realise they will be working later into their 60s than their parent/grandparents. The state pension is rising to 67 from 2028 with early access to private pensions rising to 57 so 60 is probably a reasonable age to start taking benefits.

      Be interested to hear what others think on this.

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  3. I've been away over the weekend, enjoying the rugby, hence the delay in my response. I do believe in looking a gift horse in the mouth, so that I can then go and check its rear to see what is coming out from it. In other words, does everything make sense.

    I'm not sure you can conclude that the "The government are clearly concerned that not enough young people are saving." In most cases, nearly everyone should be saving more; but we are in the age of the consumer society and people living "on tick" as my parents would have referred to it, so it doesn't make sense to just target the young (where is the strategy? or is it as most of the commentary refer to it a gimmick.)

    There are already significant incentives to save through the existing pension system, with the ability in many cases to receive greater contributions from the employer plus tax relief, ISAs and "Help to Buy" schemes of all sorts.

    There is no clear strategy attached to what has been done with the LISA (except to replace the existing "Help to buy" schemes, probably). In the run up to the budget, there was a strong belief that the Chancellor would significantly cut the tax relief available on pensions, but was obviously spooked out of doing so and introduced the LISA instead without any clear strategy of where the government is going other, than trying to bribe the electorate and what would appear to be a back-door introduction of changes to the pension system.

    Also, if you want to help the 1st time buyers, it would have been beneficial to have cut the CGT on sale of "buy to let homes" as well as on the other things it cut it on, instead of continuing to penalise these people (and I have no self interest in this as I have not gone down the "buy to let"), to further encourage the sale of these homes as most of them are 1st time buyer types of properties.

    As to raising the age that one can take personal/company pensions, that is irrelevant to the age when you can take your state pension. Those who have worked hard and saved enough should not be forced to continue working because the government is restricting when they can access most or their funds. This sort of change as far as I'm aware is not affecting those such as footballers who can take their pensions earlier. A further example of the government telling us what we can and can't do.

    My last response on this as I think we are diametrically opposed.

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