BUT THE Lifetime Isa unveiled in the Budget is not without its drawbacks writes Jeff Salway
The options open to young savers will widen next year with the launch of the lifetime Isa – or Lisas – but so will the chances of making the wrong choices.
Steep penalties, the risk of overlooking more suitable long-term options and the complexity created by the arrival of another form of Isa are among several drawbacks highlighted by experts after the new product was announced in the Budget.
The scheme will be available from April 2017 and will allow anyone aged between 18 and 40 to save up to £4,000 a year into the account. The government will pay an annual bonus of 25 per cent at the end of each tax year, up to age 50.
The savings can either be used towards retirement or for a deposit on a first home worth up to £450,000. If it’s the latter, the money can be taken out at any point, including the bonus, provided the account has been open at least a year. It will operate alongside the existing help-to-buy Isa until 2019, when the latter will be scrapped,
The complications come later on. If the account is used for retirement the saver will be allowed to take the proceeds tax-free after their 60th birthday. But any withdrawals before that date will charged an exit fee of 5 per cent and paid without the perks (such as the bonus and any interest).
Andy Bell, chief executive at AJ Bell, called on the government to abandon the exit charge.
“Assuming the Treasury will receive the 5 per cent penalty there is a huge sense of irony that the government is making moves to ban early exit fees levied by pension providers but is happy to levy one itself,” said Bell
“Early exit penalties are a relic of a bygone pension industry and there is no role for them in modern savings products.”
Many believe the scheme will prove more popular as a first-time buyer vehicle than as a long-term savings product.
“If someone under the age of 40 is hoping to get onto the property ladder then the lifetime Isa offers a 25 per cent bonus that will incentivise the potential purchaser,” said Derek Stewart, managing partner at Sam Wealth in Glasgow.
Some students may benefit from investing their student loan in a lifetime Isa in preparation for buying their first home, he added.
“But they need to consider whether to invest in cash deposits or stocks and shares and obviously there are associated risks and rewards.”
But how does it stack up as a retirement savings option? The lifetime Isa can be used in addition to a pension, but many will view it as a choice between the two. Which is most suitable will depend to some extent on whether the saver is a basic or higher rate taxpayer.
“Unless you are earning more than the higher rate tax threshold the tax relief on pension contributions will be limited to 20 per cent, you won’t be able to access funds until you are 55 and only 25 per cent of your fund will be tax free, with the balance taxed as income when you take it out,” Stewart pointed out. “The lifetime Isa is completely tax free.”
The number of young workers saving into pensions has increased sharply since automatic enrolment began in 2012. Fewer people than expected have exercised their right to opt out of the scheme, and younger workers are the least likely to do so. The lifetime Isa risks undermining that success, warned Stewart.
The big advantage of workplace pensions is that savers benefit from tax relief on contributions and employer contributions that will outweigh the tax benefits of the lifetime Isa. Those already automatically enrolled, or who soon will be, should remain in their scheme.
However, the bonus in addition to the Isa tax benefits will ensure the new option is popular with under 40s who are unable to benefit from workplace pensions, such as the self-employed.
Neil Lovatt, sales and marketing director at Scottish Friendly, believes the lifetime Isa will be an attractive alternative to traditional pensions.
“Years of industry mismanagement of pensions and endless tinkering and ‘revolutions’ by politicians has left the pension brand as a no go area for most young people,” he said. “Isas on the other hand have a far more positive brand.”
The entry age for lifetime Isas will increase over the coming years as the government squeezes the tax advantages of pensions, Lovatt predicted.
“This will result in a shift from what was becoming a really disfiguring upper and middle class tax break in pensions to a more equitable form of matched contributions by the government.”