Probably the biggest surprise of yesterday's Budget was the announcement of a new Lifetime ISA. But just what is it, and could you benefit? We take a closer look…
The Lifetime ISA is set to launch in April 2017 and will be available to those aged 18-40 who wish to save up to £4,000 per year. In doing so, they'll receive a 25% top-up from the Government – for every £4 saved, the Government will give a bonus of £1 – which could result in a maximum bonus of £1,000 per year.
Savers can then pay in until they're 50 years old, and the money can be put towards a house deposit or used as a pension. The latter requires the money to be held in the ISA until at least the age of 60, although it can be withdrawn earlier on the forfeit of the Government bonus (and any interest gained on it) and a 5% charge – which essentially makes this a vehicle for long-term saving – but in all instances, the money can be withdrawn entirely tax-free.
If you meet the criteria – namely that you're between 18 and 40 years old and want to save for a house deposit or retirement fund – then you could well benefit. First-time buyers will be able to put the money saved towards a home worth up to £450,000, and if you're buying as a couple, you can both have an account (as accounts are limited to one per person rather than one per home) and secure double the Government bonus.
In this instance, the money can be withdrawn any time from the first 12 months after opening an account, so there's nothing to say you have to keep it for years. As an added bonus, if you've already got a Help to Buy ISA or take one out before next April, you can transfer those savings into a Lifetime ISA in 2017. Alternatively, you could continue saving into both, but you'll only get the Government bonus on one of the accounts.
However, it's important to remember that you really do need to be committed to one of these goals, as taking the money out before your 60th birthday for anything other than a house purchase will result in a hefty charge of 5%, and you won't get the Government bonus, either.
This all depends on how much you're able to save. There's no stipulation that you have to save the maximum £4,000 per year, so essentially, the Government will give you a bonus of 25% on anything you're able to squirrel away. However, those who are able to save the full amount could truly benefit: if someone saved the full £4,000 per year from the age of 18 to 50, they'd have a savings pot of £128,000 from their own contributions, as well as a Government bonus of £32,000 – or £160,000 in total – and could benefit from investment growth, too.
Given that the maximum yearly investment limit of £4,000 sits well below next year's annual ISA allowance of £20,000, you may be wondering if you can save into another kind of ISA at the same time. Well, you're in luck! The Government says that savers will be able to contribute to one Lifetime ISA in each tax year, as well as a cash ISA, a stocks & shares ISA or even a new Innovative Finance ISA, as long as all contributions remain within the overall ISA limit.
The industry reaction has been largely positive, with many welcoming the focus on long-term saving. It follows the announcement of Help to Save earlier this week to offer incentivised saving to a wider number of people, and although there are fears that it could make pension saving less attractive, it's been generally welcomed by the majority.
There are some savers for whom it could be particularly beneficial, too, as Tom McPhail of Hargreaves Lansdown comments: "The new Lifetime ISA will help to supplement the existing pension system, and will be particularly attractive to self-employed people, who have been left behind by the private pension system. Similarly, many under the age of 40 have wrestled with the tough choice of whether to save for retirement or to save for a first home; the Lifetime ISA helps to address these problems by letting them keep their options open."
Overall, it could prove to be hugely beneficial for many savers. There aren't any details over exactly who will offer these ISAs as yet – or the kind of interest rates that could be available – but we'll keep you updated with any new details we receive.
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