Following the Budget announcement on 16March individuals under the age of 40 will be able to open a “Lifetime ISA” from April 2017. Lifetime ISAs (LISAs) are designed to help young people save flexibly throughout the whole of their lives: “It will help them to simultaneously save for a first home and for their retirement”.
How does it work?Like the new Help to Buy ISAs, when individuals save money, the Government with give them an extra boost – for the LISA this will be 25%. So if individuals save £4,000, they would get £1,000 from the Government. However, the ISA isn’t quite as “flexible” as it first appears, as the 25% bonus will only be provided at the end of the tax year, or when funds are withdrawn, and the funds with the Government bonus can only be used for a first home and/or retirement. Funds can be withdrawn at any time for other purposes, but the Government bonus will have to be repaid with a 5% charge.
In addition, the LISA will come under the same limit as other ISAs meaning that the overall limit across all accounts from April 2017 will be the new limit of £20,000 per tax year. And when using the funds to buy a first home (worth up to £450k), there is an initial minimum holding period of 12 months from opening the account before any money can be withdrawn. An individual can have both a Help to Buy ISA and a LISA but can only use the Government bonus to buy their first home from one account.
What’s the problem with it?Giving a bonus is a great incentive to save, but much like the historical restrictions on Pension withdrawals, savers don’t seem to be trusted to spend their money wisely. What’s more is that people over the age of 40 won’t be able to open a LISA and receive a bonus from the Government for their retirement savings. It’s also not out of the realms of possibility that people over the age of 40 haven’t yet purchased their first home, and they are being penalised for their age, unable to get on the property ladder like the many other hopeful first time buyers.
What can employers do?It’s important for individuals to plan and save for their future, but putting restrictions on them isn’t going to help. What’s key is that individuals understand how to manage their money in productive ways and that it’s never too late to save. Financial education can help your employees learn how to be better with money and understand the best ways to plan for their future. Many companies also now provide their own in-house saving schemes for employees. If you can show your employees that they are valued, they will be more engaged and productive at work as a result.
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