The Lifetime ISA (Individual Savings Account) announced in the Budget will be introduced in April 2017.
It will be available to savers under 40 on 6th April 2017, giving the opportunity to save up to £4,000 a year in a tax-free wrapper.
Contributions of up to £4,000 a year into the Lifetime ISA will receive a government top-up of £1 for every £4 saved.
This effectively means a government bonus of up to £1,000 will be available for savers adding the full £4,000 a year to their Lifetime ISA.
This government bonus will be available each year up to age 50.
It will be possible to withdraw money from a Lifetime ISA at any time, although a 5% penalty would be applied and the government contribution plus interest removed.
However, if the money is used after one year to buy a first home, or withdrawn after age 60, it can be withdrawn tax-free and without penalty from the Lifetime ISA.
The first home can be purchased with Lifetime ISA monies on this tax- and penalty-free basis after twelve months if it costs the saver up to £450,000.
It will be possible to use more than one Lifetime ISA to purchase a property, so a couple could have one Lifetime ISA each, both receiving the government top-ups on their savings, and then combine the money to buy a first home.
The Lifetime ISA will replace the existing Help to Buy ISA, with the option to transfer monies saved in these to the new account.
It will be possible to have a Lifetime ISA and a conventional Individual Savings Account (ISA) running at the same time.
The ISA contribution limit is set to remain at £15,240 for the 2016/17 tax year.
When the Lifetime ISA is introduced in 2017/18, the ISA allowance will increase from £15,240 to £20,000 a year.
The Lifetime ISA has been broadly welcomed, with Ian Sayers, Chief Executive of the Association of Investment Companies saying:
“We welcome this boost to ISAs which will incentivise saving across the generations.
“The Lifetime ISA is long overdue help for under-40s to save for their future – whether that’s a home or long-term saving for retirement. This is an opportunity to generate a savings culture and boost long-term share ownership amongst millennials.
“The future increase in the ISA limit is important at a time when interest rates are low and the pension changes to the lifetime allowance and annual allowance are taking effect.”
According to NFU Mutual, 1 in 6 adults would be encouraged to save if they could borrow a limited amount of savings before they retire to use towards a house deposit.
This increased to a third of savers when speaking to 18-24 year olds, making the appeal of the Lifetime ISA greater for younger savers.
Research from SunLife highlighted the need for a Lifetime ISA, with their survey finding 26% Brits have no savings.
This rises to 37% for 18-34s, part of the target audience for the new Lifetime ISA.
Here at Informed Choice, we believe that the Lifetime ISA could help create a new savings culture in Britain, especially if additional flexibility is introduced ahead of April 2017 allowing the government bonus deducted from early withdrawals to be returned if the savings are replaced.
This more flexible system would mimic the American 401K for retirement savings, allowing easier access to the pot of money in response to life events, but also the opportunity to replenish the savings in the future, ahead of retirement.
What do you think about the new Lifetime ISA? Use the comments section below to share your thoughts or ask any questions you have.