Chancellor George Osborne’s Budget included a new lifetime Individual Savings Account (Isa) designed to incentivise young people to start saving for their first home or pension.
25% bonus
The chancellor’s new Isa will be available from April 2017 and can be opened by savers between the ages of 18 and 40. The savings account offers savers a 25% bonus from the government. You will be able to deposit up to £4,000 annually, accruing a bonus of up to £1,000. The government will pay this 25% bonus each year until you reach the age of 50. Savers will not be taxed on the interest.
Who is the lifetime Isa for?
The savings account is meant to provide incentive and aide young people to save for their first home or pension. We’ve previously written about the millennial generation and their short-term financial perspective and the Chancellor seems set on changing that. The new Help to Save scheme launching later this year is similarly encouraging low paid workers to save too.
What is the lifetime Isa for?
If you would like to use the money to buy a home you will be able to do so a year after you have opened the account, however this only applies if this is your first home. If you wish to put the money towards your retirement, you must wait until you reach the age of 60 to be able to withdraw it. Savers can save in cash or invest their money in stocks or shares. Savers with a help-to-buy Isa can transfer the money or keep the help-to-buy account, however they will only receive the bonus from one of the savings accounts.
Is there a catch?
The lifetime Isa allows you to withdraw your savings without buying a home or as a pension, but in doing so you forfeit the government bonus and you have to pay a 5% charge - unless you are withdrawing the money due to a terminal illness. The Office for Budget Responsibility are worried that the new lifetime Isa will drive housing prices up, and exclude first time buyers without parental support from the already pressed housing market.
If you would like more information on Lifetime Isas, please get in touch. You can also read our summary of the 2016 Budget to find out how changes to tax, savings and pensions will affect you.
