ISAs  

Think tank argues Lifetime Isa should be linked to Cash Isa

Think tank argues Lifetime Isa should be linked to Cash Isa

Michael Johnson, research fellow at the Centre for Policy Studies, has said consideration should now be given to some additions to the Lifetime Isa, such as a bridge linking the Lifetime Isa to the Cash Isa.

According to Mr Johnson, transfers of cash across the bridge should immediately attract the Lifetime Isa's bonus. 

From April 2017, people under the age of 40 will be able to open a Lifetime Isa and contribute up to £4,000 in each tax year.

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The government will then provide a 25 per cent bonus on these contributions at the end of the tax year.

This means that people who save the maximum each year will receive a £1,000 bonus each year from the government.

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 Johnson said the underlying objective would be to encourage a culture of investing in asset classes other than cash, assimilating today's two Junior Isas, the two New Isas and legacy child trust funds into the Lifetime Isa, thereby considerably simplifying the Isa landscape.

Alongside this, Mr Johnson said the Lifetime Isa's inheritance tax rules should be placed onto the same footing as that of pension assets.

He said other default features of the Lifetime Isa could include a passively managed, non-cash, default fund, which are already very popular among members of the National Employment Savings Trust, with a take-up rate of more than 99 per cent, perhaps with a cost cap and automatic reinvestment of income.

Taking stock dividends could be made the default for holdings of shares, he added.

According to Mr Johnson, a Workplace Isa should be introduced to accommodate employer contributions made within the automatic-enrolment framework. 

.He added these should be taxed at the employee’s marginal rate but eligible for the same bonus as the Lifetime Isa, and withdrawals from the Workplace Isa should not be permitted until the age of 60.

Mr Johnson said auto-enrolled employee contributions, made with post-tax income, should be payable directly into the employee’s Lifetime Isa, and they should also be eligible for HM Treasury’s bonus, and subject to the same tax, withdrawal and penalty rules as other Lifetime Isa savings.

Mr Johnson said: "Over the next few years the Treasury has an opportunity to reshape the (retirement) savings landscape in a manner that could increase the savings of millions of people and reduce Treasury expenditure. 

"An integrated Lifetime Isa and Workplace Isa would leave the individual with a single retirement savings vehicle, able to hold cash and investments, to serve from cradle to grave. This would signal the emergence of a true lifetime savings agenda (as opposed to pensions) in a manner consistent with the freedom and choice agenda launched in 2014’s liberalising Budget."

Mr Johnson's comments come after earlier this week Baroness Ros Altmann, former pensions minister, warned the Lifetime Isa isn’t even close to being as beneficial as a pension post retirement freedoms.