Looking forward to the Lifetime ISA – if you are under 40
Perhaps the most significant announcement in the recent Budget was the news of the Lifetime ISA. A few commentators are suggesting that many taxpayers in their 20s and 30s will ditch saving into a pension scheme and will view the Lifetime ISA as the better way to save for their retirement.
The Lifetime ISA will give a government top up of 25% of the amount invested and the ability to accumulate savings income tax free – just like a pension.
In addition, there is the ability to eventually withdraw all the funds tax free rather than 25% of a pension fund. You will however have to wait until you are 60 rather than 57 (minimum pension access age is set to rise from 55 to 57 by April 2028). Alternatively, you can access the ISA earlier for the purchase of a first home up to £450,000. You can also access earlier for any other reason but this comes at the price of losing the government top up, the accrued income associated with it and suffering a 5% penalty. The government is however considering whether Lifetime ISA funds plus the government bonus can be withdrawn in full for other specific life events in addition to buying a first home.
There is still a lot to be said for pension contributions if you are a higher rate taxpayer. The government top up for a 40% taxpayer is effectively 67% ie £6,000 of pension contribution after full tax relief provides investments of £10,000.
The biggest constraint in the Lifetime ISA will be an annual investment limit of £4,000. Many basic rate taxpayers who can afford to save more than this may well go for a strategy of utilising their Lifetime ISA allowance first and then saving into a pension. Also a couple whose aim is to buy a house together can each use a Lifetime ISA to accumulate funds for the prospective purchase.
The scheme is not scheduled to start until 6 April 2017 and it will be open to any adult under 40 from that date. Once you qualify, you can continue to save up to £4,000 each year and will receive a 25% bonus on the contributions made up to the age of 50.
It’s a pity if your 40th birthday is on the 6th April 2017.
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