A new Lifetime Isa has been unveiled which is designed to help people under the age of 40 save for retirement or buy their first home.
Chancellor George Osborne announced in his Budget today (16 March) that a new Isa will be introduced from April 2017.
Up to £4,000 can be saved each year and savers will receive a 25 per cent bonus from the government on the amount they save.
Savers will be able to make Lifetime Isa contributions and receive a bonus from the age of 18 up to the age of 50.
Mr Osborne said: “For every £4 you save, the government will give £1.”
Money put into this account can be saved until the age of 60, when it must be used as retirement income or withdrawn to help buy a first home.
There is a 5 per cent exit fee for people wanting to withdraw funds from the Isa before the age of 60. Savers who do this will not recieve the government bonus.
Mr Osborne said: “For the basic rate taxpayer, that is the equivalent of tax-free savings into a pension, and unlike a pension you won’t pay tax when you come to take your money out in retirement.
“For the self-employed, it’s the kind of support they simply cannot get from the pensions system today,” he said, adding that unlike a pension the money can be accessed at anytime.
Meanwhile, Mr Osborne announced a dramatic change to all Isas, with the total amount you can save each year increasing from £15,240 to £20,000 from April 2017.
Dan Farrow, director at Chelmsford-based SBN Wealth Management, said it was a Budget for the middle earners, pointing out that very few people under 40 have £4,000 in disposable income.
Keith Churchouse, chartered financial planner at Guildford-based Chapters Financial, said the proposal is probably a a “sweetener for the younger folk” ahead of the EU referendum.
“There was much thought that this time round about the removal of higher rate tax relief, which all seems to have been aborted or deferred.
“I don’t think those issues have gone away and they will be bought back to bear later on in the year once we are passed the referendum.”
Phil Smith, chief executive of Sipp provider Hornbuckle, said the introduction of the Lifetime Isa is a “stroke of pragmatic genius” from the chancellor.
“He is starting 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.”