Lifetime ISA is welcome, but could go further

21 September 2016

Gary Heynes

There was some uncertainty whether the Lifetime ISA, announced by the former Chancellor, George Osborne, would go ahead as planned. However, HMRC has now updated its technical note and confirmed that the new account will be available from April 2017.

For those aged over 18 but under 40, they will be able to save £4,000 per annum and the government will add a very generous 25 per cent bonus each year to the amount saved in the year, up until age 50.

The funds can be used at any time to buy a property worth up to £450,000 or can be left until age 60, from which point they can be released as cash, or retained in the tax free environment and released as needed. A release earlier or for any other purpose will result in a 25 per cent charge - effectively being the clawback of the government contribution plus a penalty.

Savers looking for a tax efficient arrangement will therefore have an option of pension schemes, which are now more flexible than ever before, regular ISAs and Lifetime ISAs and will need to carefully weigh up the benefits of each. The current Help-to-Buy ISA will be phased out.

For longer term savings, both pensions and Lifetime ISAs have benefits of government contributions and pension even more so when higher rate tax relief is taken into account. Pensions have a fixed date from which funds can be accessed (age 55) and while Lifetime ISAs can be accessed earlier, there is a 25 per cent charge.

Regular ISAs are very flexible but have no additional government contribution.

So, the problem savers have is that the decision of which savings route to take needs to be made at the outset and a change in plans a few years later can be disruptive to the investment decision.

Perhaps it would be more useful to have a single, more flexible, savings arrangement, one which combines all of the benefits of these savings arrangements, such as higher rate tax relief and government contribution, with open access but with charges only being applied when the monies are released. In other words, shifting the decision on the tax impact of accessing funds, for different reasons and at different ages, would only need be made at the time of need, with less disruption to the initial investment decision.

While the Lifetime ISA is certainly welcome, maybe this should be the first step on a road to true flexible savings.

If you would like any more information on this issue please contact Gary Heynes.