In his final Budget as Chancellor in 2016 – before he reinvented his career as a crusading newspaper editor – George Osborne announced, with his usual theatrical pomp, that the Government was creating a new savings account – the Lifetime Isa – to empower the under-40s who, he said, “haven’t had… a good deal from the pension system.”
The principle was simple enough. As Mr Osborne said at the time: “Young people can put money in, get a government bonus, and use it either to buy their first home or save for their retirement.”
For every £4 you save, the Government adds £1 (worth up to £1,000 every tax year until you turn 50 years old). You can save up to £4,000 a year to get the Government’s 25 per cent bonus – and you can withdraw all of the money completely tax-free. You also won’t have to pay any income tax, dividend tax or capital gains tax on the growth within the Isa.
If you’re using the funds to buy a property, you can withdraw them at any time. If you’re using it for retirement, you can access the money tax-and-penalty-free at the age of 60.
Mr Osborne sold it as a shiny alternative to a pension. He said that for “the basic rate taxpayer, that is the equivalent of tax-free savings into a pension, and unlike a pension you won’t pay tax when you come to take your money out in retirement”, while the self-employed could use a Lifetime Isa and get support in a way that the pensions’ system couldn’t offer.
The Lifetime Isa was supposed to be more attractive because, as Mr Osborne said: “Unlike a pension [which you can only access at age 55] you can access your money anytime without the bonus and with a small charge.”
So, if you withdraw money for any other reason, you will face a 25 per cent penalty on the amount withdrawn. You must return the bonus, plus any interest or growth on that bonus, and pay a small fee (5 per cent).
But has the Lifetime Isa become the saviour of millennials struggling to get their foot on the property ladder? Or indeed the vehicle of choice to park your retirement savings.
Almost a year since they were launched, I think it’s fair to say “no”.
First and foremost, there’s hardly a market for Lifetime Isas at all. There’s just one cash version, offered by Skipton Building Society, which pays a paltry 0.5 per cent interest.
The remaining five providers – Hargreaves Lansdown, Nutmeg, Share Centre, app-based Moneybox and, launched just last week, One Family – all offer stocks and shares Lifetime Isas.
The big high-street banks and building societies haven’t bothered with them at all – despite the fact they could lead the savers of today to become the borrowers of tomorrow. Perhaps they went through all the rigmarole of setting up the hugely popular Help to Buy Isas – which essentially offer the same deal as a Lifetime Isa, albeit with lower allowances – and didn’t want to indulge another of the Chancellor’s headline-grabbing offers.
That leaves people looking to get on to the property ladder using the Lifetime Isa a little stuffed. There’s just one provider out there with no competition – that’s left Skipton to acquire 42,000 savers (as of October last year). Great for the building society, sure, but not a particularly healthy market for consumers.
Of course, there is more choice on the investment side. And although there’s nothing to stop people from doing it, it’s not a particularly wise move to invest savings designed for a mortgage deposit. If you’re in your early 20s, perhaps, and the journey to home ownership is a decade-long project, the stocks and shares route could be right.
But investing over a timeframe shorter than five years puts you at the mercy of the markets – if you were planning to buy a home any sooner, you’d risk potentially losing some of the deposit, or seeing the lot wiped out in a market meltdown.
It’s worth remembering what was motivating Mr Osborne when he launched the Lifetime Isa. The prior year, he had commissioned a consultation on how the Government incentivises people to save for their retirement.
The Government has done this through tax relief – essentially a top-up to your contributions, later reclaimed when you start drawing an income from your pension. But Mr Osborne envisaged a radical change, suggesting there could be a world where the Government no longer shells out billions in tax relief upfront, in exchange for not collecting tax from withdrawals – which many argued would be a poor alternative to a pension.
The Lifetime Isa was the opening salvo – if there was enough interest and a vibrant market for the product, could it be a viable pensions replacement, consequently saving the Treasury billions of pounds today and leaving the shortfall in tax receipts of the future for another Chancellor to deal with?
Without knowing how many people are using them to save for retirement, it’s difficult to answer this conundrum. But there seems to be little appetite in reforming the pensions system in the way Mr Osborne envisaged.
This leaves the Lifetime Isa market in a slightly odd state – weighted towards long-term saving despite the fact that a pension is still a better deal than an Isa and no competition in the market that is most immediately-appealing for younger savers.
There are changes coming in April – the Government bonus, currently paid annually, will switch to monthly, which could mean new entrants to the cash market. And in the One Family launch, it’s good to see another provider offering more choice.
But I do wonder whether there is a future for the Lifetime Isa – or if this is one of Mr Osborne’s mercurial tricks as Chancellor that he hasn’t quite pulled off.
Gareth Shaw is head of Which? Money Online