George’s gift of a lifetime – only for the under 40s
IT WAS not quite the savings revolution we had been led to expect earlier in the month when all the rumours were about an impending – and unwelcome – cut in the tax relief available on pension contributions.
But Chancellor George Osborne still managed to use last Wednesday’s Budget to confirm a major shift in the long-term savings landscape.
Despite bowing to overwhelming pressure from Middle England not to cut the cherished tax relief that higher rate taxpayers currently receive on their pension contributions, or remove it altogether, the Chancellor unveiled a new savings initiative which some experts believe signals his long-term intention to reduce the importance of pensions. In with Individual Savings Accounts, out with pensions.
The proverbial savings rabbit that Osborne pulled from his Budget ‘hat’ was the ‘lifetime’ Isa, a complement to the existing Isa but different in key ways.
Currently, any adult can save a maximum of £15,240 in the tax year ending April 5 into an Isa. Contributions can be put into cash, shares, investment funds or a mix. These contributions are made from taxed income, but savers can make taxfree withdrawals whenever they wish. It is the exact opposite of the pension where contributions are made from gross pay but withdrawals from age 55 are taxed – after the right to 25 per cent tax-free cash.
The lifetime Isa stands somewhere in between a traditional Isa and a pension. Indeed, it looks similar to the pension Isa that was being mooted in the run-up to the Budget.
Although contributions will still come from taxed income, the Gov- ernment is going to lob in a bonus. In effect, for every £4 a lifetime Isa investor contributes, the Government will put in an additional £1.
But this juicy carrot comes with a string of provisos. For a start, the new Isa will only be available from April 6 next year, and then just to those who are under the age of 40. Anyone older will not be eligible for the lifetime Isa although they have not been entirely forgotten by the Chancellor. They will see their annual Isa allowance jump from £15,240 – this tax year and next – to £20,000 from April 6, 2017, increasing substantially their opportunity to build a sizeable tax-free fund.
Those eligible for the lifetime Isa will only be allowed to contribute a maximum £4,000 a tax year – with the Government topping up this amount by up to £1,000 a year until the planholder hits age 50 when no more bonus will be paid.
But they will still be able to put aside up to £16,000 on top into a conventional Isa if they can afford to.
Unlike a standard Isa where holders can access money at any time without penalty, the new lifetime Isa is specifically designed to help young people buy their first home – and put aside funds for retirement.
As Osborne said in his speech, the lifetime Isa is a ‘completely new flexible way for the next generation to save. You don’t have to choose between saving for your first home, or saving for your retirement. With the new lifetime Isa the Government is giving you money to do both.’
The flip side of this is that if proceeds from the Isa are not used for either of these purposes – a first home or as post-age 60 income – penalties will apply. Quite stiff ones.
A five per cent exit charge will be levied on any withdrawals made before age 60 – and not used to buy a first home. Plus, the Government will take away some of the bonus it has put into the Isa account – and any subsequent investment growth that bonus money has enjoyed.
So, if a lifetime saver puts £800 into their account in the first year, the Government will top it up with £200. If this £1,000 has then grown to £2,000 after five years and the Isa saver then wants to take out all their money, they will only get back £1,500.
This is because they will incur a £100 exit charge – five per cent of
£2,000 – plus forego £400 of combined bonus and bonus growth that goes straight back to the Government. Those already using Isas to build a home deposit through ‘help to buy’ will be allowed to transfer any accumulated funds into the new lifetime Isa from April 2017.
The amount transferred will not count towards their annual £4,000 contribution limit and will be eligible for the 25 per cent bonus. Adam Taylor, a 28-year-old public relations adviser from Kennington, South London, is putting money into a help to buy Isa so he can buy his first home. Next April, he will be able to transfer his funds into a lifetime Isa. He says: ‘I will definitely look into it. Despite the pressure of saving for property, I understand the long-term value of a pension and I worry about having enough money to retire on comfortably. Choosing a pension is difficult but Isas are well understood so I think the lifetime Isa will prove popular.’