As trailed in recent press reports, the Chancellor has backed away from announcing the far-reaching changes discussed in last year’s pensions tax relief green paper.
Instead, ‘Lifetime ISA’ accounts will be launched in April 2017 to encourage long-term saving amongst younger people — in such a way that they will not have to choose between saving for retirement and saving for their first home. Those aged between 18 and 40 will be able to open a Lifetime ISA and save up to £4,000 each year. Savings made before the individual’s 50th birthday will also receive a Government bonus of 25% — i.e. a total maximum saving of £5,000 a year. The total ISA limit will be increased from £15,240 to £20,000 from April 2017, and Lifetime ISA savings will count towards that limit.
Savings can be used towards a deposit on a first home worth up to £450,000. However, most other withdrawals prior to age 60 will result in loss of the Government bonus (and any interest or growth on this), as well as a 5% charge. There will be an exception for cases of terminal ill-health and possibly other specific life events, subject to further consultation. After age 60, all savings can be taken tax-free.
Those with a Help to Buy ISA can transfer those savings into the Lifetime ISA in 2017, or continue saving into both, but will only be able to use the bonus from one to buy a house.
Whilst the new product offers a welcome boost to flexible savings for those aged under 40, it does not simplify the current pensions system and introduces further complexity for savers attempting to decide between pension saving schemes and other products. There is a risk that it will undermine auto-enrolment and lead to more young people opting out in favour of a more flexible savings product. In the longer term, it may be that the Lifetime ISA represents the first step in an incremental process of steadily supplanting the existing pensions tax system.
For the investment management and insurance industry and other providers of ISAs, there will be a short period of engagement with HM Treasury/HMRC on the practicalities of implementation before legislation is brought forward in the autumn. Operational and systems changes will require rapid attention, once final details are available, if providers are to be ready to offer this new product by April 2017.
This article was first featured in the KPMG Budget 2016 Commentary, view the full commentary PDF here.