The Lifetime ISA – another one for the scrapheap?17 November 2016
The Lifetime ISA – another one for the scrapheap?
With less than six months remaining until the proposed introduction of the Lifetime ISA, much still needs to be done to pass through one of George Osborne’s perhaps most notorious policies. Following a recent spate of U-turns concerning the former Chancellor’s policies by Teresa May’s newly established Government, and a recent warning from the FCA that savers may not understand it, Gary Smith, financial planner at Tilney, suggests now is as good a time as any to take stock of what the Lifetime ISA does, who it benefits and what its impact may be.
What is a Lifetime ISA?
“A Lifetime ISA is a savings vehicle aimed at providing a sum for either the purchase of the saver’s first home, or for retirement. Technically, it sits somewhere between a regular ISA and a pension.
So who will benefit?
“Clearly the Lifetime ISA is aimed at the young, with only those aged 40 or under able to open one. Introduced in the main to help people get on the housing ladder, this plan brings with it a 25% bonus on the amount contributed. Such an immediate – almost risk free – return will seldom be found within a regular ISA and is comparable to basic rate tax relief on pensions. The plan brings with it the added benefit that the bonus can be retained if, instead of using it to purchase a home, it is held until at least the saver’s 60th birthday. Above all, the sums saved, along with the bonus can be accessed at either of these events completely tax free.
“The Lifetime ISA aims to ingratiate the younger generations to long term savings by removing the stigma of access associated with pensions. Whilst pensions cannot typically be accessed until age 55 and above, the Lifetime ISA can be withdrawn at any point, albeit with the loss of bonus and subject to a penalty if not used in qualifying circumstances. Regardless, it will on the face of it be more attractive to young individual savers – especially those looking to get on the housing ladder – than its ISA and pension counterparts.
“High earners who already maximise their Annual Allowance or who are subject to the recently introduced Tapered Annual Allowance are likely to seek to use the Lifetime ISA to supplement their retirement savings.
What kind of take up can we expect?
“The Treasury is expecting a reserved take up, after recently issuing projected costings for the proposal, stipulating that the net bonus cost to the exchequer would amount to just £10m each year initially. Whilst this may sound like a hefty bill to the taxpayer, it is but a drop in the ocean in comparison to the overall pension tax relief bill of circa £34bn per annum.
“Perhaps the biggest issue though, is that those taking advantage of the Lifetime ISA will not be the savers intended when the proposal was originally penned. The fact remains that those needing a deposit the most, simply cannot afford to save, regardless of the 25% bonus available due to the high rents they pay and unattainable deposits, so what’s the point in risking a potential 5% withdrawal charge? Instead, you’ll find it is those who already possess savings elsewhere or parents who save on behalf of their child who will benefit the most.
“Furthermore, you may find that the highest earners who have already maximised their pension contributions for the year will opt to put further sums into the Lifetime ISA to boost their tax free/tax beneficial savings even further.
So is this a case of the rich getting richer?
“Well, not completely. It may persuade some people on the cusp of saving to start a Lifetime ISA, and indeed, there are the restrictions on age (aimed at those typically of lower net worth) and contribution amounts, restricting how much people can benefit.
“The fact remains though, that it is another half-hearted attempt at solving the current property crisis in the UK. The benefit of rolling the ISA into retirement savings if not used for a property are not without catch too, as maximum relief is only 25% in comparison to a potential maximum 60% on pensions. Moreover, it is likely that the Lifetime ISA will form part of an individual’s estate for Inheritance Tax purposes.
“Whilst the Treasury has assumed savers will not opt out of Auto Enrolment schemes to fund a Lifetime ISA, the fact remains that for lower earners there is only so much money available to them. If it is a house they need, they will redirect their pension contributions to a Lifetime ISA. What’s more, basic rate taxpayers may opt to switch their current and future pension saving to a Lifetime ISA to benefit from the ability to withdraw their cash tax free in retirement.
“This is where good quality information and advice is a necessity. Opting out of a pension could result in the loss of an employer contribution, or redirecting savings to a Lifetime ISA could have significant Inheritance Tax issues later in life. Ultimately, the whole picture needs to be taken into account before rushing headlong into any saving decisions.
“The issues mentioned are but a few, but with less than six months before the proposed introduction of the Lifetime ISA, the Government needs to not only ensure the mechanics of the proposal are determined, but also promote knowledge and understanding to the masses. Even the FCA has warned that savers may not have a full understanding of the product and its penalties.
“However, taking into account the existence of Help To Buy ISAs and pensions already, perhaps it would simply be better for the Government to stop, think and consider the real issues and formulate a more targeted approach to the UK’s saving and property issues.
To discuss this or any other financial planning topic please contact Gary Smith on 0191 269 9971/ firstname.lastname@example.org
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