April 2017 will see a new addition to the Isa family. Targeted at younger savers and investors, the Lifetime Isa (Lisa) aims to encourage long-term savings. The Lisa attracts bonuses to help with property purchase, retirement or both. When combined with a huge hike in the annual Isa contribution allowance to £20,000 and a cut in capital gains tax (CGT), it is probably the best time in living memory to be an investor from a tax point of view.
Why the new Isa?
To understand why the Lisa is being introduced, we must first look at the relevant policy issue it is trying to address:
• To deliver transparency, increase people’s knowledge of and engagement with pension savings. The solution here is the pensions dashboard, although it still looks a long way off,
• To encourage younger people to save.
This is all against the backdrop of a pensions tax relief consultation which provided no consensus on change. Furthermore, initial results of the take-up of Help to Buy (350,000 and counting) showed younger people are more likely to save independently for property than for retirement. Therefore, instead of changing pensions, the decision was made to go for a new product, which would be incentivised and which could be used for both purposes – firstly property, to get people into the savings habit, and then subsequently retirement – potentially killing two birds with one stone.
Policy makers are very keen to get younger people to think about long-term planning and planners will be applauding them for that.
A Lisa is obviously an Isa and as such will be subject to Isa regulations. Regardless of some similarities to pensions and the thought that it is the first step toward a longer term ambition to become the new way of saving for retirement, it is not a pension. Concerns from pension providers about the impact on auto-enrolment opt-outs are somewhat premature.
The Lisa is a complementary product to the current suite of products available, which avoids the black and white decision – whether to save for property or for a pension.
There will be cash and stocks-and-shares versions, but no Innovative Finance Isa option.
Up to £4,000 can be saved or invested per year, which will attract a bonus of 25 per cent of the amount contributed, up to £1,000. It is important to say this is a bonus and not tax relief. The £4,000 Lisa allowance falls within the overall £20,000 Isa allowance for tax year 2017/18.
As with all other Isas, growth, interest and income are all tax-free.
Lisas will be available to all UK residents over the age of 18 and under 40. Once opened, contributions can be paid until age 50, providing the opportunity to save a maximum of £128,000 with a bonus of £32,000 on top. Third party payments are also possible.
To me it would make more sense to say everyone born on or after 6th April 1977 would be eligible. This would allow those who can’t afford a Lisa at age 39 to still be eligible if they can afford it by the time they are 41.
The current plan is that bonuses will be applied for annually (April) by Lisa managers and then paid the following summer.
There is a good case for a monthly bonus or certainly for bonuses to be paid when contributions are made (as per the ‘P’ word). This would encourage regular savings and avoid people waiting to bunch contributions to the end of a tax year (the problem currently is that contributions paid on 6 April 2017 would not receive a bonus until the summer of 2018).