Lifetime Isas - nicknamed the Lisa - were announced by chancellor George Osborne in his March 2016 Budget, as part of a package of measures to support young people and get them saving for a home and for a pension.
Key points:
■ From 6 April 2017, any adult under 40 can open a Lisa and pay in a maximum of £4,000 a year.
■ This will be in addition to a cash or stocks and shares Isa, subject to overall annual Isa investment caps of £20,000. Transfers will be allowed from one Isa into another.
■ For every £4 an investor saves, the government will boost this with £1; so for a full year’s worth of investment, the government will bolster people’s savings with a 25 per cent bonus.
■ Funds can be withdrawn from the Lisa with the government bonus from age 60 for use in retirement.
■ Withdrawals before 60 not for a home will be subject to a 5 per cent levy and a loss of the bonus.
Carol Knight, chief operations officer for the Tax Incentivised Savings Association, said: “This will be a new type of Isa so investors can still subscribe to a stocks & shares, cash and innovative finance Isa in the same tax year.”
Confusion between Lisa and traditional pension saving could result in employees forfeiting valuable employer pension contributions Tom Williams According to Richard Donegan, managing director of Selftrade, Lisas are a great addition to the savings landscape.
“We see the 25 per cent government bonus on top of the tax advantages associated with Isas, being an effective way of incentivising people to save towards buying their first home or for their retirement.”
Richard Parkin, head of pension at Fidelity International, agreed they are a good addition: “This will make a meaningful difference for younger savers who value flexibility and for whom the current system of pension tax relief offers little.”
This is especially pertinent, noted Danny Cox, chartered financial planner for Hargreaves Lansdown, given the latest Isa statistics from HM Revenue & Customs, which showed a 16 per cent drop in the numbers of younger adult subscribers in the 2013 to 2014 tax year.
“Falling numbers of younger Isa savers illustrates the necessity of introducing the right incentives through the Lisa to encourage good long-term savings habits,” he stated.
Will it replace a pension?
Many people already use pensions as a form of retirement income. Simon Massey, director of wealth management at MetLife UK, pointed out their research among retirement savers aged 45-plus showed a strong interest in Isas, with 40 per cent planning to use some of their tax-free savings for retirement planning.
Although it looks set to become law, even politicians have expressed concern, saying Lisas should not be taken out at the expense, for example, of the auto-enrolment workplace pensions regime.
Although the Department for Work and Pensions, in a memorandum to the Work and Pensions Committee (WPC), said: “An Isa, whatever you call it, is not a pension; this Lifetime Isa, in my view, is not [a pension]”, Mr Osborne did seem to muddy the waters.
Yet in his Budget speech, he said the Lisa was “for those under 40, many of whom haven’t had such a good deal from the pension system”.
In May, the House of Commons’ WPC’s 11th session report on automatic enrolment stated: “The Treasury’s Lisa factsheet depicts savings going towards either a house or a piggy bank labelled ‘pension’.”
AJ Bell co-founder Andy Bell warned: “The Lisa will go head to head with auto-enrolment and I predict the new kid on the block will win hands down.”
According to Neil Lovatt, product director at Scottish Friendly, Lisas will be the pensions of the future.
“They represent the original Blairite stakeholder pension idea from two years ago. Put simply, they are a long-term, tax-advantaged savings account that can be used for retirement or major lifetime events,” he said.
“Given the terrible brand pensions have - and in my opinion it will get worse by the time we go through a mis-selling scandal over pension freedoms - something had to be done to make long-term savings more popular.”
| House of Commons’ Work and Pensions Committee conclusion: |
“People could be forgiven for concluding the Lisa was, in part, a pension product. Whatever the attractions of the Lisa, it must not be presented as a direct alternative to AE. “Savings under AE carry an employer contribution, which will not be available in the Lisa. Opting out of AE to save for retirement in a Lisa will leave people worse off. “Government messages on this issue have been mixed. While the DWP has been very clear that the Lisa is not a pension product, the Treasury has proffered an alternative view.” - Source: House of Commons Work and Pensions Committee 11th report of session 2015-16: Automatic Enrolment |
However, there are some issues. Mr Lovatt cited “consumer confusion as one”, while his colleague and Scottish Friendly savings expert Calum Bennie said: “There is a danger if young people simply go to their usual bank to take out a Lifetime Isa, their investment will be in cash and could just rot away with the dismal rates of interest currently on offer.”
Mr Parkin added: “The levy on withdrawal before retirement means the Lisa is not a great option for those who need flexibility.”
Moreover, it may bring an element of confusion, as Tom Williams, chartered financial planner for WH Ireland, said: “Confusion between Lisa or traditional pension saving could result in employees opting out of company pension schemes and forfeiting valuable employer pension contributions.”
The table (below) from Aegon highlights the difference between a Lisa and a pension, which could be helpful when involved with corporate advice about workplace pensions.
| LISA | Pension |
Eligible age at outset | 18-40 | Birth to age 75 |
Investment growth | Tax free | Tax free |
Government incentive | 25% added to after-tax contributions after the tax year end | Basic rate : 25% added to after tax contributions at payment date Higher rate : 66% added to after tax contributions (may require reclaim through tax returns) |
When can withdrawals be taken | When paying first home deposit, or age 60, or if terminally ill. If taken otherwise, all Government incentive and growth thereon is lost and there’s an additional 5% penalty | Age 55 onwards or if terminally ill |
Tax treatment on proceeds | No tax if withdrawn for house deposit, if held till age 60 or if terminally ill | 25% tax free with remainder taxed at marginal income tax rate |
Contributions that receive Government incentive | Up to £4000 per year up to age 50 | Up to £40,000 including tax relief provided you have sufficient earnings |
Employer contributions | Not allowed | Required for all relevant employees aged 22 and above and can be very substantial |
Treatment on death | Part of estate so subject to IHT | Not usually part of estate so no IHT |
Transferrable? | Yes, to another LISA | Yes, to another pension |
Other features | May be able to access for other life events. May be able to borrow and regain any loss of bonus if fully repaid |
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Source: Aegon
