Budget 2016: Lifetime Isa offers new saving incentive for young workers’ lifetime

They would be able to carry on adding cash until their 50th birthday, at which point they would be awarded a 25 per cent taxpayer-funded bonus

The Morris family at Williamson Park, Lancaster with daughter Seren (Steve Morgan)

Younger workers would be given financial incentives to save for their first home as well as their pension under plans for a new Lifetime Isa announced by George Osborne.

In a surprise announcement, the Chancellor said the savings scheme launched next year would be open to people aged between 18 and 40.

They would be able to carry on adding cash until their 50th birthday, at which point they would be awarded a 25 per cent taxpayer-funded bonus.

Financial experts said the initiative could encourage young people to accumulate retirement pots in tax-free Isas rather than build up money in pension schemes.

Mr Osborne said: “You don’t have to choose between saving for your first home or saving for your retirement. With the new lifetime Isa, the Government is giving you money to do both. For the basic rate taxpayer, that is the equivalent of tax-free savings into a pension and, unlike a pension, you won’t pay tax when you come to take your money out in retirement.”

The scheme will allow savers to contribute up to £4,000 a year, entitling them to an annual bonus of up to £1,000, as well as any interest.

It is designed to help them afford two major “life events” – getting on the housing ladder and retirement.

Savers will be allowed to use some or all of the money they accumulate towards a deposit for their first home as long as it is not more than £450,000.

They will also be able to collect tax-free their funds in the new Isas when they are 60. If they withdraw the money before that age, they will lose their government bonus and any interest, and will have to pay a 5 per cent charge. But if someone was diagnosed with a terminal illness they would be able to take their cash out, including the bonus, tax-free, regardless of age.

Aspiring home buyers who are saving in the recently-launched Help to Buy Isa will be able to transfer their savings into the Lifetime Isa.

Huw Evans, the director general of the Association of British Insurers, said: “The test for success for the lifetime Isa will be whether it increases overall retirement savings and does not undermine the auto-enrolment programme.”

Martin Lewis, the founder of MoneySavingExpert.com, said: “The real cleverness behind this for the Treasury is that if people use this rather than a pension, as it comes from taxed income, it gets the revenue now. If they put it in a pension, the revenue has to wait years until it gets tax. So, this could be Mr Osborne cleverly grabbing cash out of a future Chancellor’s pocket.”

Philip Smith, the pensions partner at PwC, said: “Market forces are now likely to drive more younger savers towards Isas and away from pensions, a trend that will be accelerated if the Chancellor goes ahead with the type of flexibility offered in the US that allows savers to withdraw savings and repay later.

“It’s interesting that older savers have not been included in the new Lifetime Isa. This may point to a future dual track system, leaving the current pension system in place, but introducing the pension Isa by stealth. Once the market beds down, a change to a fully-fledged pension Isa becomes much easier.”

Case study: ‘There are some positives but also a few things that trouble us’

Hannah Morris is a 31-year-old charity worker living in Lancaster with her husband Alex, 31, and their 21-month-old daughter Seren.

We’ve just moved into our first house, which we were only able to buy with help from an inheritance. The new lifetime Isa sounds like a positive thing for young people who want to save. We just missed out on some of the Help to Buy schemes.

Using the funds to help with pensions is something I feel uncertain about – it seems so far off before I’ll see any benefit from it that I don’t even trust that the money will be there by the end of my career.

As a mother, I’m not sure how I feel about schools being turned into academies. From what I’ve seen, academies can be great in terms of facilities. But I’m not comfortable with the idea of schools being run as businesses.

For work I do a lot of driving, including a one-hour commute which isn’t reimbursed. So for me, the freeze on fuel duty is a relief as the predicted increase would have cost our family significantly.

Living in the north, I’m pleased the HS3 rail link has been given the go-ahead, but there are so many things that are being ignored.

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