Lifetime ISA has been '˜cobbled together'
This new initiative allows people between 18 and 40 to save up to £4,000 a year, with the government giving a £1,000 bonus on that amount boosting your savings by 25 per cent.
Unlike other ISAs you can only open an account if under age 40 and you will receive tax relief on contributions made before age 50. In theory someone paying in the maximum could earn £32,000 worth of bonuses.
Unfortunately to keep hold of the bonus you have to leave the savings in the account until aged 60.
At 60 the waiting will then be worthwhile as this money can then be accessed tax free. The only time you will be able to access the money before aged 60 without penalties is if you want to purchase a property as a first time buyer and are not paying more that £450,000.
If you are a first time buyer it wouldn’t do any harm to open the earlier version of the Lifetime ISA, the Help to Buy ISA. This pays the same bonus as the Lifetime ISA but restricts you to a £1,000 payment on opening plus £200 per month. Then in 2017 it can be transferred over to the Lifetime ISA and it will not count towards the £4,000 lifetime ISA allowance for that year.
The negatives of the Lifetime ISA are that compared to mainstream ISAs the amount you can save initially is relatively low and targeted with regard to age. Perhaps the biggest downside is that if you want your money out, unless you are buying your first house, you will lose all your bonus and incur a five per cent penalty.
Overall I think the Lifetime ISA is very good value for savers, but I get the feeling it has been cobbled together and is a bit of a compromise for the Chancellor. I believe that originally this scheme was to be aimed at the whole of the market with a reduction of higher rate tax on pensions, but last minute pressure from his party made him back off for the time being on this reform.
Also once this scheme is running it is estimated the cost to the tax payer will be £850m per year. It could be argued by some that this money could be put to better use, and the Lifetime ISA could contribute to higher house prices as deposits will be bigger.