In advance of the Chancellor’s 2016 Budget statement there was widespread expectation that tax relief on pension contributions would be reduced. However, with the EU debate raging, the Government decided against making any controversial changes – at least for the time being!
What did happen was that the Chancellor announced a new variant of the Individual Savings Account (‘ISA’) which some are suggesting could in the long term supplant pensions as the principal means of saving for retirement.
The Lifetime ISA (LISA) will be available from 6 April 2017 to people aged between 18 and 40 and will include a savings incentive which is not provided by standard ISAs. In contrast to pensions, where contributions can be made regardless of age, investment in LISAs can only be made to LISAs up to age 50.
The maximum permitted contribution will be £4,000 a year. The Government will add a 25% bonus meaning those investing the full £4,000 will receive a top-up of £1,000. Spouses could each contribute to their own LISA and qualify for the bonus.
Apart from providing a source of retirement income after age 60, the LISA is designed to assist first time buyers to purchase a home with a value of up to £450,000.
Penalty-free withdrawals will be permitted from age 60 onwards or at any time if used for a deposit to purchase a house. In any other circumstance, the Government bonus and any growth in its value will be lost and a 5% penalty imposed.
Concerns are already being expressed that the LISA may discourage the lower paid from contributing to workplace pensions. There is also an apparent conflict with the ‘Right to Buy’ ISAs which were announced only a few months ago. ‘Right to buy’ ISAs do appear less attractive but transfers to LISAs will be permitted.
The annual ISA savings limit will rise to £20,000 for all adults from April 2017 but in 2016/17 will remain at £15,240 in 2016/17.
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