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Budget 2016: Osborne launches Lifetime Isa for under 40s

The chancellor has announced a new savings products for under 40s to put towards retirement or a first home
March 16, 2016

Chancellor George Osborne left pensions alone today and instead unveiled a new Lifetime Isa for those under 40 pitched as a way to help young people save for retirement or a first home.

The new Isa will enable savers from the age of 18 to earn a 25 per cent government bonus on up to £4,000 of savings each year from April 2017, giving them £1 for every £4 saved in cash or stocks and shares and translating to a £1,000 boost each year. Qualifying investments will be the same as for a cash or stocks and shares Isa.

The sum can then be used either to pay for a first home, just like the new Help to Buy Isa, or must be left untouched until the age of 60.

It will count towards a new raised annual Isa allowance from £15,240 to £20,000 and savers can withdraw the funds tax-free any time after the first year of opening the account in order to buy a home of up to £450,000 or from the age of 60 for any other purpose. Anyone attempting to withdraw the money for another purpose before that age will be hit with a 5 per cent charge and would have to pay back the government bonus as well as any interest or growth.

However, Mr Osborne also raised the possibility of savers being able to return money to the Isa account and reclaim that bonus, like the flexible American 401K model. The Treasury has said it will be working on the details of these possible amendments before April 2017.

The announcement was welcomed by Tony Stenning, head of retirement for Europe at BlackRock, who called the move a "great simplification" of the benefits of saving - something many investors told a survey his company carried out that they wanted.

"I think it is a great step in articulating [pension saving] in the right way," he said but acknowledged there was "more we can do".

The change raises important questions for young people about whether to save into a pension, an Isa or both. Unlike a pension, the Isa works by giving tax relief on money on the way out of the Isa as opposed to offering up-front tax relief on the way in.

Under the new system, savers will be able to have a pension (and receive employers' contributions) while also saving into the Isa and several commentators said savers should keep both.

Jon Gwinnett, product technical manager at Nucleus, said: "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."

Savers can also keep several Isas open at once, including a Help to Buy Isa, which remains available to new savers until November 2019 and open to new contributions until 2029. Anyone already saving into a Help to Buy Isa will either be able to roll that amount into a Lifetime Isa or maintain both Isas but will only be able to use the government bonus on one of the Isas to put towards the deposit.

However during the 2017/18 tax year anyone already owning a Help to Buy Isa will be able to transfer those funds into a Lifetime Isa and still receive that bonus. Any transfer of funds saved in a Help to Buy Isa before 5 April 2017 will not count towards the £4,000 annual contribution limit.