Short of ISA ideas? This week as part of our Guide to ISA Investing we reveal the top rated and top performing stock and fund ideas – as well as sharing where the experts stash their cash, the latest news from the 2017 Budget Report and how to reduce your tax bill.
Next month a new tax-efficient savings vehicle will be launched, designed to help savers under the age of 40 get on the housing ladder and prepare for retirement.
Under the rules of this scheme savers can put up to £4,000 a year into the Lifetime ISA, and for every £4 they add, the Government will put in a further £1 – boosting their pot by up to £1,000 a year. For basic-rate taxpayers this is equivalent to the 20% tax relief they would get on pension contributions. The government contribution is set to cost the public purse £170 million per year. There is a charge if money is withdrawn before the saver’s 60th birthday, unless it is used for a deposit on a first home.
Savers will be able to make Lifetime ISA contributions and receive a bonus from the age of 18 up to the age of 50, although it must be opened before the individual’s 40th birthday. Over their lifetime, savers will be able to have contributions of £128,000 matched by the government for a maximum bonus of £32,000. The Lifetime ISA will be launched on April 6 this year.
Lifetime ISA: Not Without Risk
The Lifetime ISA was proposed in last year’s Budget – to mixed response. Fans of the Lifetime ISA hailed the proposal as supportive young Britons, who have not enjoyed the favourable financial circumstances of older generations. The baby boomers are often reported to have enjoyed both a housing and stock market boom – as well as wage inflation, significant increases in the quality of food and health. Many older investors have benefitted from defined benefit pension schemes in their workplace which are more generous than the defined contribution schemes new workers pay into under auto-enrolment.
Not everyone agreed the Lifetime ISA was a good idea however. There was accusations that it encouraged short-termist saving – prioritising getting on the housing ladder over saving for retirement, where there is a real shortage of funding.
The Financial Conduct Authority has addressed some of these concerns in a consultation and has today released its recommendations which include the Lifetime ISA carrying risk warnings on an individual favouring it over a workplace scheme.
Rachel Vahey, product technical manager at Nucleus, said: “Widening out the risk warnings to include cautioning investors on giving up an employer pension contribution to either a personal pension or an occupational scheme makes perfect sense. Losing out on the valuable employer pension contributions for all actual or potential pension scheme members would be significant and the right warnings need to be in place at the right time to help people make the best decisions.”
Who Benefits from the Lifetime ISA?
There has been some discussion about who benefits from the Lifetime ISA, with some suggesting it is unfairly biased towards families with affluent parents or grandparents who can save on behalf of their adult children. A study from The Share Centre backs this up, showing 64% of investors over 40 will encourage younger generations to open a Lifetime ISA.
Darren Cornish at The Share Centre, revealed: “We have already had strong levels of interest expressed by customers who see the Lifetime ISA as perfect for helping the younger generations of their family get started on their own investing plans. They are keen for their children and grandchildren to benefit from the government bonus on offer, and they like the idea of a penalty charge that encourages them to keep their money locked in for the long term.”
Time will tell if the Lifetime ISA succeeds in encouraging young people to think longer term when it comes to their personal finances, or whether the experiment does not come off.
