When is a pension Isa not a pension Isa? When it’s a Lifetime Isa, it seems.
Having been rebuffed in his attempt to replace pensions – and the pesky tax relief on them that he picks up the tab for – with an Isa system that he doesn’t, George Osborne has dangled a carrot instead.
In his Budget yesterday, the Chancellor unveiled his latest wheeze.
It’s a cross between even more help to buy and the aborted pension Isa plan – and it’s a clever idea.
The Lifetime Isa lets people save for retirement and a home at the same time and get a savings boost
It takes aim at the conundrum that younger workers face of whether to save for a property or retirement, by offering a pension tax relief-style boost to a pot that can also be used to buy a first home.
They can put in up to £4,000 a year and will get a £1 bonus for every £4 saved. That cash and bonus is available tax-free to buy a first home, or after the age of 60.
This solves a problem for both savers and George Osborne.
The former no longer have to prioritise a home or retirement and the Chancellor starts to divert younger people away from pensions and the cost of higher rate tax relief.
Instead, he uses the lure of being able to access the cash to tempt higher rate taxpapers into stashing their money in a Lifetime Isa, where the top-up is only the equivalent of basic rate tax relief on pensions.
I actually think the Lifetime Isa is quite a good idea, but I have concerns about people tempted to opt for just this and not a pension.
They may ultimately end up saving less and going for cash over investing, which will limit long-term growth potential.
Secondly, tapping into the money you need to be saving for retirement means less in the pot for your pension years.
Finally, the younger savers tempted by the Lifetime Isa may end up passing up the incredibly valuable element of pension contributions from an employer.
In workplace schemes where you can get your contributions matched – or even bettered – these employer contributions can make the real difference to saving enough money into a pension and prove far more worthwhile than any tax relief.
There’s one group who yesterday was great news for though: entrepreneurial under-39s who are higher-rate taxpayers and have money to spare after saving into a pension.
They can now also invest into a lifetime Isa and add the £1 bonus for every £4 saved to the tax relief that they already get on their pension.
They will also get an income tax cut, thanks to the raising of the 40p tax rate to £45,000.
A bit of internet trading or AirBnBing could deliver some money on the side – and they’ve got a new £1,000 tax-free allowance for that.
And if they already invest outside of an Isa, they can also sell some shares or funds and benefit from a lower capital gains tax rate – which may also help them if they ever get that start-up off the ground and sell it one day, or their crowdfunding investments pay off.
Of course, these people are few and far between, but if you are one of them, congratulations, George Osborne delivered you a good Budget.
THE LIFETIME ISA AT A GLANCE
Who can open a Lifetime Isa?
The new Lifetime Isa can be opened by those aged under 40 in April 2017 and use it to invest in stocks and shares or for cash savings.
What will it offer?
Savers can put in up to £4,000 a year to qualify from a maximum government bonus of £1,000 – contributions will get this 25 per cent top-up every year until age 50. This is a £1 bonus for every £4 that you save.
How do I get the bonus?
The bonus will be paid on some or all money taken out to buy a first home, or after the age of 60.
What if I need the money earlier?
Money taken out of the Lifetime Isa before age 60 for anything other than a first home will lose the government bonus, all interest or stock market growth delivered by that element, and face a 5 per cent charge.
Can someone under 40 start save into a Lifetime Isa as well as a pension?
Yes, the two are separate and designed to complement each other. They will get both a Lifetime Isa bonus and tax relief on their pension?
Does the annual Lifetime Isa allowance fall within the new total £20,000 Isa umbrella?
Yes, the new £20,000 Isa allowance – raised from just over £15,000 now – includes money put into a Lifetime Isa, cash Isa, stocks and shares Isa and the new Innovative Isa.
Can someone who is already a homeowner get a Lifetime Isa?
Yes, it is open to all those aged under 40 in April 2017