The Downsides To The New Lifetime ISA

Well another budget came and went and there were changes to the personal allowance for the better, and a further freeze on fuel duty, as was the case for beers, ciders and spirits.

Aside from the sugar tax there were no real surprises aside from the small matter of a huge increase to the ISA allowance to £20k from April 2017.

So what’s changed?

While the allowance has risen to £20k for everyone, it’s younger savers, specifically those aged 18 to 40 who now have the choice of stashing their cash in a new up-to-£4k ‘Lifetime ISA’, or Lisa as it has quickly become known

The chancellor was true to his word and didn’t tinker with pensions in what appeared to be an about turn from the flat rate that many believed would be introduced on Wednesday.

The Lisa has been designed as a cradle-to-grave savings account. Individuals will be able to save up to £4,000 a year in the new ISA and the government will top it up with a 25% bonus, meaning for every £4 saved, the government gives you £1.

The £5,000 saved in the Lisa each year, including the government top up, will count towards the new £20,000 ISA limit, which will increase from £15,240 next April.

Unlike a pension, the money in the Lisa can be used to buy a first home worth up to £450k, alternatively, individuals can continue to save and receive the 25% bonus, until the age of 50.

If the money is accessed after age 60 it can be taken tax-free, but if it’s accessed before that age, unless you’re buying a home, the government bonus will be lost as well as any interest or growth and there’ll be a 5% charge.

Is it a good thing?

Do the positives outweigh the negatives? Well the Institute of Fiscal Studies (IFS) think so, saying that the Lisa provided a clear saving incentive.

Indeed, on the face of it, if a person saved the maximum £4,000 a year from age 18 to 40 then they can expect a maximum top up of £32k from the government for a contribution of £128k giving a total of £160k – not a bad deposit for a house.

However, in my view the Lisa could, and should go further. As things stand by 2017 the auto-enrolment rules will insist all employers pay at least 3% into their employees’ pensions as long as employees are contributing 4%. The government then tops up the contribution with a further 1%, and of course there’s no tax paid on the contributions as it’s all dealt with at source.

While the additional 4% may not sound like much of an incentive to save into a workplace pension, people should look long and hard when deciding whether to opt in or out as that 4% gift, once compounding has been taken into consideration over a number of years could turn into a significant sum.

The Foolish bottom line

It’s been clear to me for some time now – we need to save more for our retirement, and while pensions are, in my view one of the best vehicles to achieve our goals, they fail to take into account certain life events, such as buying a house, or starting a family. And while I welcome the Lisa as a step in the right direction, I think that individuals need to think very carefully before deciding which vehicle to use when planning for retirement.

In my view, investors should look to put their hard-earned cash into businesses that can turn a profit whatever the weather.

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