Chancellor George Osborne’s new Lifetime Isa, unveiled in the Budget today, has been branded a gimmick and a ‘crowd pleasing rabbit pulled out of a hat’.
The new Lifetime Isa for people under the age of 40 means that 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.
However, Adrian Walker, retirement planning expert at Old Mutual Wealth, has branded the new product a “gimmick”.
“The Lifetime Isa is a gimmick that will only appeal to younger savers looking for help getting on the housing ladder. Very few people will use a Lifetime Isa to save for old-age and pensions are still the best retirement savings vehicle.
“The £1 bonus for every £4 is parity with the basic rate relief you currently receive on a pension, but crucially without employer contributions. Younger savers will also have to place faith in future governments not to renege on the promise of a bonus at age 60.”
Jason Hollands, managing director at Tilney Bestinvest, says the Budget is no different to previous ones “with crowd pleasing rabbits being pulled out of the hat”.
He says the move by the Chancellor appears to be an attempt to mend fences with affluent savers, with them being most likely to benefit from the new Isa.
“When you consider only a very small proportion of investors are currently able to fund the £15,240 annual allowance as it is and bearing in mind, also, that from 6 April basic rate taxpayers and higher rate taxpayers will respectively be able to earn their first £1,000 and £500 of interest tax outside of ISAs tax free.”
The Chancellor also unveiled an increase in the annual Isa limit, from £15,240 to £20,000 from April next year.
“With a couple being able to tuck away an astonishing £40,000 a year in Isas, that means the vast majority of Britons should be able to ringfence their savings and investments from the tax man,” says Hollands.
The new product will allow money to be withdrawn at any time, subject to a 5 per cent charge and forfeiting any interest or growth and the government’s bonus, says Osborne.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 also says those that have already made use of the Help to Buy Isa will be able to roll it into the new savings scheme.
The move by the government could also create confusion among consumers about the Isa products available, says Andy Bell, chief executive at platform AJ Bell.
“There is a danger of us ending up with a spaghetti soup of Isa products.
“Savers will have the choice of a cash Isa, a stocks and shares Isa, a Junior Isa, an innovative finance Isa, a help to buy Isa or a lifetime Isa. Having multiple Isa products with lots of different rules is complex and confusing. The big selling point of an Isa is its simplicity.
“We will be campaigning for a single Isa product with different allowances and benefit rules depending on the savers’ circumstances. Separate Isa products for each circumstance will just increase costs to savers.”
“The Lifetime Isa will go head to head with auto enrolment and I predict the new kid on the block will win hands down.”
Adrian Lowcock, head of investing at AXA Self Investor, agrees that the new Isa has complicated the landscape.
“In the space of a few short years we will have gone from having two simple ISA choices to at least five ISA options. How these ISAs, and the tax allowances associated with them, interact with each other is already becoming increasingly complicated and confusing for investors and savers.”
However, Jonathan Lipkin, director of public policy at the Investment Association, says the move is an “exciting development” to help young people to save.
“This could help to create a more widespread savings culture in the UK, particularly if it can be used for long-term investment that will both fund economic growth and deliver strong returns.”
The government will look into plans to extend the use of the money beyond houses and pensions, Budget documents state, for other “specific life events in addition to buying a first home”, while also “keeping an incentive to leave funds invested for the long term”.
The new Lifetime Isa is only available to savers under the age of 40 at the opening date next April. The decision to not include older savers will create a two-track system, says Philip Smith, pensions partner at PwC.
“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.”