In the Budget yesterday (16 March), chancellor George Osborne described the Isa as a new “flexible” option for people under 40.
However, Lowes Financial Management managing director Ian Lowes pointed out that if the funds are withdrawn before the age of 60 for any purpose other than purchasing a first property, then the penalty will be severe.
Withdrawal will result in the loss of the government bonus and any interest or investment growth on this, plus a 5 per cent charge.
This, he said, ultimately translates to a 24 per cent reduction in the savings, which he argued puts the investor in a worse position than if they had used a standard Isa.
| Mr Lowes’ example: |
| 1. A Lifetime Isa with £4,000 invested receives a 25 per cent government bonus of £1,000, meaning £5,000 now sits in the pot (of which 20 per cent is the bonus). |
| 2. This doubles to £10,000 as a result of investment growth. |
| 3. A withdrawal of £1,000 takes place before age 60 but is not to buy a first home (£400 of the original capital doubled to £800, plus the £100 original bonus doubled to £200). |
| 4. So the government want their share of the £1,000 back, meaning the saver has to pay back 20 per cent, which is £200. |
| 5. The 5 per cent charge applies to the remaining balance, which is another £40, leaving the investor with £760 of the withdrawal, meaning it is 24 per cent less than it was worth. |
Mr Lowes said it will be an “unfortunate consequence” if those in their twenties and thirties choose to opt out of their employer’s funded pension scheme in favour of contributing to a Lifetime Isa, adding that “on paper this would not be advisable”.
He said basic rate taxpayers in their 20s who do not own a home are highly likely to opt for the Lifetime Isa over a personal pension.
However, Mr Lowes said it would be “short-sighted” of savers to expect they can switch to a current-style personal pension when they are in their forties.
“The current pension regime will be as good as abolished by then in favour of an evolved Lifetime Isa” Ian Lowes“I speculate the current pension regime will be as good as abolished by then in favour of an evolved Lifetime Isa.”
He suggested the culmination of proposals around pension tax relief, the ‘Pensions Isa’ and the removal of tax-free status of pension commencement sums, make it look likely the Isa will become the retirement savings vehicle of the future.
This is a theory echoed by many senior industry figures, who have suggested the new Isa could look more attractive to savers than a personal pension.
Mr Lowes added: “Those looking at buying a house in the next couple of years, should already be contributing to a Help to Buy Isa and will be among the first to invest in a Lifetime Isa.”
He pointed out though, that with a £4,000 annual contribution limit on the new Isa, the bonus on one year’s contribution will at best cover the legal fees for buying a house.
For those in their 50s or 60s, Mr Lowes said a pension is a more attractive vehicle than an Isa, particularly for higher rate tax payers and those with a potential inheritance tax liability.
katherine.denham@ft.com
