The Lifetime Isa: looking good, but there’s room for improvement
Despite warnings from some quarters to the contrary, the Spring Budget made no change to the Lifetime Isa. This means the scheme will launch as planned in April at the start of the 2017/18 tax year.
The timescale to deliver the Lifetime Isa (Lisa), following the announcement by the then chancellor George Osborne in March last year, has been incredibly tight. As a result, a gradual launch period is expected as providers bring their Lisa offerings to the market during the year, rather than all being available from day one.
Government too has adopted a transitionary approach and for the first year will pay the government bonus element in August 2018, before moving to monthly payments. As a consequence of this, no penalty charges will be levied on non-qualifying withdrawals within the first year of the Lisa.
Lisas can be opened by people aged between 18 and 40, although once a Lisa has been set up you can save into it up to age 50. A maximum of £4,000 can be subscribed each year and the government will then add a bonus of 25 per cent of those contributions.
For 2017/18 only, it will be possible to transfer savings in an existing Help to Buy Isa into a new Lisa without it being counted towards the annual allowance, with this amount qualifying towards the government bonus.
When it comes to withdrawing money this can be done, including the bonus and without penalty, in only three circumstances: to help buy a first home worth up to £450,000, in the case of terminal illness, or from age 60.
Until 5 April 2018 it will also be possible to withdraw funds without facing a government charge, but you won’t get any bonus. After this there will be a 25 per cent government charge (ie forfeit of the bonus plus a 5 per cent penalty) on any money withdrawn, unless it’s for any of the reasons above.
Concerns have been expressed that the Lisa will undermine the success of workplace pension auto-enrolment. However, saving via a pension remains the best and most tax-efficient way of saving, for several reasons.
Individuals get tax relief up front, at least equal to the rate of the Lisa government bonus, and pensions tax relief isn’t capped at £1,000 a year. Lisa savings, in contrast, are made after both tax and National Insurance. And Lisa doesn’t offer the equivalent of the pensions tax-free lump sum or attract any employer pension contribution.
A more pragmatic and consumer-focused view is that the generous government bonus provides a much-needed incentive for many who currently find it hard to save. The success of the Help to Buy Isa demonstrates that there are hundreds of thousands of people who would take advantage of government incentives to save.
Lisa will help younger people with a first property purchase, and also benefit the self-employed and low-paid who do not qualify for auto-enrolment scheme benefits.
But there is scope to make improvements to the Lisa. First, we’d like government to scrap the 5 per cent penalty charge on non-qualifying withdrawals. It’s questionable whether this is necessary as a deterrent. While it is right that any bonus, plus (or minus) any investment growth on it, should be refunded to the government, the additional penalty charge spoils the overall message.
Second, if the qualifying age for Lisa savings were raised to age 50 it would widen the opportunity for the self-employed to take advantage of the Lisa. As more people become self-employed and can’t access employer-sponsored pension schemes, the need for them to save for retirement will become even more pressing.
Third, Lisa could be made more attractive by widening the range of qualifying events that would not trigger the withdrawal of the government bonus to include redundancy, long-term sickness and next house purchase.
The Lisa is the latest addition to the expanding range of Isa schemes, joining the Flexible Isa and Innovative Finance Isa, alongside the more established cash and stocks & shares options.
In general, this is a positive move. Isas have been a huge success, due in large part to the continuing support given by government. Confirmation in the Spring Budget that the annual subscription limit is increasing to £20,000 for 2017/18 means Isas offer choice and capacity for savers.
However, this has added some complexity and we think there are three changes that would make Isas easier for people to understand and match the appropriate Isa type to their particular savings need.
First, government should remove the requirement that a customer can only take out one Isa a year of each type. Instead, make the only requirement that people should not subscribe more than the overall Isa limit for the year.
Secondly, scrap stamp duty for Isa investments. These are long-term products and this would send a clear government signal that it is determined to make the UK a better place to save after leaving the EU.
Thirdly, make the annual Isa allowance divisible by 12 again. It assists administration and helps to keep costs down.
Isas, along with the increase to the personal savings allowance, offer encouragement for saving across a range of cash and investment options. But it’s important that future government policy meets all savers’ needs, and we’ll keep pushing for the enhancements that help bring this about.
Carol Knight is chief operations officer at Tisa