Last March, former chancellor George Osbourne stood up in parliament and announced the introduction of Lifetime ISA’s, billed as the new flexible way for the next generation to save for retirement and a potential replacement of our current pensions system.
The money can be withdrawn tax-free to help buy your first home. Any funds not used for a first home, can be paid out any time after age 60 or on death, without any withdrawal penalty or tax. Taking money out at any other time will incur a 25 per cent penalty.
The overall maximum contributions into ISA’s from April will be £20,000 per annum, so paying £4,000 into a Lifetime ISA will mean that a maximum of £16,000 can be paid into other ISA’s. The Lifetime ISA can be invested in many different asset classes such as shares and fixed interest investments, as well as cash. It is likely that cash will be more suitable for short term needs such as buying property, whereas shares will be more suitable for those saving for retirement.
Lifetime ISA’s are potentially very good value for young savers, but few providers have committed to them. Hargreaves Lansdown have said that they will offer them from April and Fidelity and Zurich are expected to follow suit during the tax year.
The more providers that offer these schemes, the more competitive the set-up costs will become, so advisers are recommending that savers wait for a few months before setting them up, to benefit from greater choice.
These ISA’s look great for first time buyers but not necessarily as good as traditional pension schemes, if saving for retirement. With pensions, higher rate tax payers get £100 invested at a cost of £60 whereas with the lifetime ISA they only get £75 invested at a cost of £60. Advisers are also concerned that future governments may decide to tax the proceeds of lifetime ISA’s, making them even less attractive for higher-rate tax payers.
David Hill is a Chartered Financial Planner and Trust & Estate Practitioner at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814, email firstname.lastname@example.org or see www.hillsfinancialplanning.co.uk