Chancellor George Osborne has announced an increase to the Isa allowance to £20,000 per year, and has launched a lifetime Isa for under 40s.
Osborne will increase the Isa limit for everyone from the current £15,240 to £20,000 from April next year.
From 6 April 2017 he will also introduce a lifetime Isa for anyone under the age of 40. For every £4,000 each individual saves the government will give them a £1,000 bonus. Individuals can continue saving until they reach the age of 50.
Savers will also be allowed to use the money either to buy their first home or to save for their pension. They can use the cash to buy a home any time from 12 months of opening, while they can use it from age 60 for use in retirement. However, they will not be taxed on any withdrawals from the savings pot.
Money can be withdrawn at any time, subject to a 5 per cent charge and forfeiting any interest or growth and the government’s bonus, says Osborne.
The government will set a limit on any property purchased at £450,000, with this limit applying nationally.
The government will also consult on plans to allow borrowing against the funds without incurring a charge if the borrowed funds are fully repaid.
Osborne will consult on plans to allow investors to put money back into accounts after they have withdrawn cash.
“We’re going to consult with the industry on whether, like the American 401K, you can return money to the account to reclaim the bonus – so it is both generous and completely flexible,” said Osborne.
Those that have already made use of the Help to Buy Isa will be able to roll it into the new savings scheme. The government states: “During the 2017-18 tax year, those who already have a Help to Buy: Isa will be able to transfer the savings they have built up into the Lifetime Isa and still save an additional £4,000.”
The government will look into plans to extend the use of the money beyond houses and pensions.
“Whilst this is a product aimed at encouraging saving for the long term, the government understands that circumstances change so wants to ensure that people can access their own money if they need it whilst also keeping an incentive to leave funds invested for the long term,” the Budget documents state.
“The government will consider whether Lifetime ISA funds plus the government bonus can be withdrawn in full for other specific life events in addition to buying a first home.”
Jon Gwinnett, product technical manager at Nucleus, says: “The lifetime Isa looks to be a reaction to the need to encourage the young to save for their future and we welcome this pragmatic solution. It makes savings easier to access for many, and will hopefully help encourage the savings habit.
“It may be seen as the first step on the road to a pension Isa for everyone, but pensions still offer greater potential for total savings – the difference between TEE (taxed, exempt, exempt) and EET, (exempt, exempt taxed).”
Alistair Cunningham, financial planning director at Wingate Financial Planning, says: “That it’s only for a first home, or tied up to age 60, with the maximum entry age of 40 will make it very niche. I strongly suspect that this is the predecessor of the changes intimated in the ‘Strengthening the Incentive to Save’ consultation, that Osborne did not have the stomach to implement in this budget.”