A Lifetime Isa which matches investors’ contributions with a 25 per cent bonus was unveiled by Chancellor George Osborne in this week’s Budget
Up to £4,000 can be saved each year and savers will receive a £1 bonus for every £4 saved from government; as with existing Isas, investment growth on savings and withdrawals remain tax-free.
The Lifetime Isa will be available from April 2017. Investors will be able to make 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Money can be put in until age 60, when it must be used as retirement income or withdrawn to help buy a first home.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 exit early will not recieve the 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.
“For the self-employed, it’s the kind of support they simply cannot get from the pensions system today,” he said, adding that the money can be accessed any time.
Meanwhile, he announced a dramatic change to all Isas, with the amount you can save each year increasing from £15,240 to £20,000 from April 2017.
Lynda Whitney, partner at Aon Hewitt, said the Chancellor could end up killing off pensions.
She said: “The Lifetime Isa is to be welcomed as it addresses the need to engage with young people to save for the future. However, we fear the mix of saving for house purchase with longer term saving for pensions. Will people invest in low-risk assets – protecting the capital while ignoring the need to take enough risk to generate enough returns for a pension?”
Dan Farrow, at Chelmsford-based SBN Wealth Management, said it was a Budget for the middle earners, pointing out that very few people under 40 have a spare £4,000 in cash lying around.
“All it appeals to is the rich parents and grandparents who will gift away the money, and the minority that have disposable income.”