Chancellor George Osborne announced in his Budget statement of a new lifetime ISA for people under the age of 40.
The scheme will allow people to save up to £4,000 a year and receive a 25% government bonus from April 2017.
Research by Royal London (RL) has found that the lifetime ISA could be an unsuitable retirement saving vehicle for those who opt for it over a workplace pension.
For those who may consider opting for a lifetime ISA as part of their savings strategy, here are some things to consider:
- the average age of a first time buyer is 31 and likely to rise, meaning that those using a lifetime ISA to save for a house purchase and then retirement will not be saving for retirement until their thirties (whereas auto-enrolment ensures they will receive a workplace pension from 22)
- government bonus contributions stop at the age of 50, while funds can’t be accessed without a 5% penalty until the age of 60
- beyond the age of 50, the tax break on the lifetime ISA is only equal to a standard tax rate relief which could affect higher earners
- the government bonus from a lifetime ISA is unlikely to match the employer contributions to a workplace pension
- lifetime ISA offers no effective tax break for those over 50 who are paying no income tax, compared to a workplace pension which offers up-front tax relief.
RL director of policy, and former pensions minister, Steve Webb, said:
“There is a real danger that the new product will mean that many young people will not start pension saving for their retirement until their thirties or beyond and will struggle to make up for lost time.
“The price of helping young people to buy a house should not be that they have to work until they drop because of inadequate retirement saving.”
Contact us today to find out more on the lifetime ISA.
