ISA family, meet your new arrival 'Lisa'
There are a number of ISAs available in the UK and from April 2017 the amount that can be invested into ISA investments will increase to £20,000 per tax year.
In addition, a new ISA will become available, affectionately known as ‘LISA’ (Lifetime Individual Savings Account) which will combine retirement savings and an opportunity to fund a first-time house purchase.
LISA who, what and when? LISA’s will be available to anyone between 18 and 40 and can receive contributions up to £4,000 p.a. up to age 50. The LISA will attract a 25% bonus from the government and can be used to fund a first home purchase (up to £450k) or accessed tax-free from age 60. Investors can withdraw the money at any time before they turn 60, but will lose the government bonus (and any interest or growth on this). They will also have to pay a 5% charge.
Anything that encourages people to save and can help people get on the property ladder has to be a good thing. Given the number of people struggling to buy their first home and the many thousands who will already be saving to try and do so, I would have thought the government forecast take-up figures of 200,000 in the first year are relatively conservative.
It must be remembered the LISA is no substitute for a pension and with the lack of employer contributions and access restrictions, I don’t see the LISA having any material impact on auto-enrolment savings. However, it could be attractive to the self-employed, who are missing out on employer pension contributions under auto-enrolment - but by removing access to LISAs for people over 40 will surely only serve to preclude much of this target group.
People using a LISA to save for their first home and their retirement are likely to be deluding themselves. Once they save enough to buy the home of their dreams, the likelihood is the LISA will be fully encashed leaving an empty pension fund and the need to start retirement savings from scratch, and over a much shorter period. Due to the magic of compound returns the best years of pension savings will have been lost.
We must wait and see if the new LISA has any impact on pension savings, particularly when auto-enrolment contribution rates start to increase. I sincerely hope it doesn’t as the mixing of short-term and long-term investment objectives within one product is likely to lead to inappropriate investment strategies and poor outcomes.
It’s interesting that the LISA came about at a time the government muted plans to change the pension tax relief system. Clearly, government coffers are, and will continue to be, under pressure and the high costs of the existing pension tax relief system might eventually become too attractive for the incumbent government to resist. Is the LISA the first step in a new tax-relief direction?
Please send any comments to AndrewPennie@ipifa.com