Lifetime ISA: The government’s new hope for young savers!

George Osborne’s budget statement, saw the creation of the Lifetime ISA, a new savings account that will give young people the opportunity to save, over the long term, for a home as well as their retirement in one account, with the government adding a bonus of up to 25% every year.

Osborne declared that this budget would “put the next generation first”, so has tried to take away the difficult choice that young people face between saving to buy their first home and saving for their retirement. He commented: “My pension reforms have always been about giving people more freedom and more choice. For those under 40, many of whom haven’t had such a good deal from the pension system, I am introducing a completely new flexible way for the next generation to save.”

However, Steve Webb, former pension minster worries that “young people would substitute the Lifetime ISA for their workplace pension”. He said: “Young savers who opt out of pensions in favour of a Lifetime ISA lose the contribution from their employer and the chance to build a tax-free lump sum from a pension pot — how will they know which is right for them?”

The new Lifetime ISA will come into effect from April 6, 2017 and will be eligible to anyone between the ages of 18 and 40 on that date.

Below are some of the main details proposed, although final details of the rules relating to Lifetime ISAs will be issued by the government later in 2016.

  • The maximum contribution a person can make is £4,000 per year to benefit from the government bonus of £1,000.
  • Savings made before a person’s 50th birthday will receive an additional 25% bonus from the government. So, if the maximum contribution of £4,000 is made in a tax year, the government will add in a further £1,000 at the end of the tax year.
  • Any savings made into a Lifetime ISA are counted as part of the overall ISA limit (which is increasing from £15,240 to £20,000 from 6 April, 2017).

Savings for a first home:

  • Any Lifetime ISA savings and the government bonus can be used towards a deposit on the purchase of a first home worth up to £450,000 in the UK. This can be done at any time after 12 months of opening an account.
  • Two first time buyers can benefit from the government bonus from their own Lifetime ISA if they are buying together.

There will be rules to set out how ‘Help to Buy’ ISAs and Lifetime ISAs will interact in terms of the government bonus and transfers into a Lifetime ISA account.

Savings used for retirement:

  • After a person reaches the age of 60, any withdrawals made from their Lifetime ISA will be tax-free. Any withdrawal made can be used for any purpose – it’s not restricted to just providing retirement benefits.
  • If savings are withdrawn before age 60 (other than to help buy a first home), the government bonus will be lost, as will any interest or growth obtained on this. There will also be a 5% early withdrawal charge.
  • Funds can be withdrawn in full before age 60 if someone is terminally ill. The government has also said they will consider whether Lifetime ISA funds plus the government bonus can be withdrawn in full for other specific life events in addition to buying a first home.

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