Chancellor George Osborne has launched a Lifetime ISA to encourage those under 40 to save for both house deposits and their retirement.
Osborne has introduced a Lifetime ISA in a move in what he claims is a completely new flexible way for the next generation to save. The government will also up the limit for standard ISAs to £20,000 a year.
People under 40 will be able to save up to £4,000 a year into a tax-free Lifetime ISA, and for every £4 deposited the government will add a further £1. This will be available until savers are 50-years-old.
The government will allow help-to-buy ISAs to be rolled into the new Lifetime ISA.
The Lifetime ISA aims to help the younger generation, known for not saving enough, to increase savings. The measure will take effect from April 2017.
Osborne said: “You do not have to choose between saving for the first time or saving for retirement. Unlike a pension, you won’t pay tax when you come to take out in retirement.”
He explained people will be able to access their money without the government bonus and with a small charge.
He added the government was exploring whether to make the lifetime ISA similar to the American 401k system where people can replace their contributions at a later date and retain the agreed bonus.
Hornbuckle CEO Phil Smith said of the new ISA: “The introduction of the Lifetime ISA demonstrates the Chancellor is helping to tackle the incentive for long-term savings with upfront tax efficiency, but allowing the flexibility to use the capital on the biggest single asset purchase most people ever make.
“This asset will increasingly form part of a saver’s pension/decumulation in later years. This will mean that SIPP providers will need to offer Lifetime ISAs as part of their strategic proposition. We intend to do so ready for April 2017.”
The Lifetime ISA is a twist on the pensions ISA which was tipped to replace the current pension tax relief system prior to the Budget but ruled out by the government last week.
The ISA is different from the current tax system in that the saver pays tax up front and is exempt when saving and when taking out funds. The Lifetime ISA will, therefore, put more money into the Treasury’s coffers in the short term.
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