With the saving incentive from the Autumn Statement falling arguably flat for long-term savers and investors, our recent study has shown that two thirds of the 25-34 year-olds we polled are still looking to the Lifetime ISA to offer them a meaningful investment option. With such a positive response from the a large portion of the market to whom the Lifetime ISA is aimed, we take a look at the mechanics of the Lifetime ISA and some further data on how it might be expected to be received.
The Lifetime ISA
The Lifetime ISA offers those between the ages for 18 and 40 the ability to save and invest flexibly for the long-term, without having to decide between investing for retirement and investing for their first home.
A person can contribute up to £4,000 within a tax year, which will then be boosted with a Government bonus of 25%. So, those who manage to pay in the maximum allowance in one year will be awarded with an extra £1,000 – that’s £1 added for every £4 a person invests.
First Time Buyers
The tax-free funds, including the bonus given by the Government, can be used to buy a first time home up to the value of £450,000. These funds can be withdrawn for this purpose anytime from 12 months after opening the account. It’s worth noting that the tax-free allowance will only be given for buying a first-time home or for retirement from the age of 60 and not for any other purpose. Those with a Lifetime ISA will be able to withdraw their funds at any time, however, if it is for a reason other than either retirement or the purchase of a first home, then a charge of 5% will be added and the Government top up will be removed from the investment.
Should a person open a Lifetime ISA from the age of 18, then over the 32 year period (at the end of which they will turn 50) they are able to contribute £128,000 which will be matched with a Government bonus of £32,000. Plus, investment growth will be added to both the contributions and the Government bonus. These top ups given by the Government continue until the point when a person reaches the age of 50. To qualify for the bonus, the funds can only be drawn upon once a person turns 60, otherwise the bonus is lost and a charge of 5% applied. The attraction to opening one of these forms of ISA for retirement is that the withdrawals made will be tax-free. This contrasts to pensions, which charge tax on withdrawals.
The Lifetime ISA, welcomed by True Potential, has not been without criticism itself. With some commentators speculating that it may stop younger customers paying in to a pension. However, the results of our recent survey has shown that this sentiment is in stark contrast to the majority view, with 58% of 25-34 year olds hoping to invest in their Lisa for retirement, not just limiting its use to their first home purchase.
What Else Do the ‘Millennials’ Think?
Our research also shows that over a third of 18 to 24-year-olds saved nothing into a pension pot in the last three months, with 31% adding nothing to their general savings in that time. Such trends have caused an ever-widening savings gap between the funds needed for a comfortable retirement and the realities of what many individuals are on track to receive.
We believe that young people’s growing interest in the Lisa is encouraging, although we would welcome modifications in the new offering, allowing employer contributions to their employees’ Lisa – something that current rules do not allow.
A Word from One of Our Senior Partners
True Potential Senior Partner Neil Johnson said: “The Lifetime ISA is certain to be popular among savers and investors who are already enthused by it.
“Much of the scare-mongering around the Lisa is about losing employer contributions. The simple way to address that is to allow employers to contribute to their employees’ Lisa by making it available under automatic enrolment. That would prevent a surge of people opting out of workplace saving schemes and means consumers could choose the right product for them without missing out on valuable employer top-ups.”
The Lisa builds on the popularity of ISAs, with official figures showing that on average savers contributed £6,064 to ISAs in 2014/15 compared to £2,840 for personal pensions.
We believe that making saving and investing options more accessible, agile and understandable is key to closing the Savings Gap for both first time buyers and those who are planning for retirement. The Lisa will help to create an environment where it is possible to account for both of these financial milestones. We’re delighted to confirm that we will be offering our own Lifetime ISA for advisers to use with their clients.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.