As announced in the Budget, the new LISA will be available from April 2017 for individuals under age 40. Contributions will be topped-up by the government by 25% with an annual savings limit of £4,000.
It can be used for buying a first home (up to a value of £450k) at any time from 12 months after opening the account, or taken from age 60 without penalty, tax free. If accessed before then, the government top up will be lost, including interest and savings which will be subject to a 5% penalty charge.
Jonathan Watts-Lay, Director, WEALTH at work, a leading provider of financial education in the workplace, supported by guidance and advice comments; “The introduction of the LISA raises some important questions for the future of pensions and long term savings. Will it be any good for savers and is it the start of the drift from pensions to ISAs in the workplace?
“There are too many variables for a simple answer such an individual’s age, level of disposable income, income tax level and saving goals. Also, how will the LISA function in practice; will it include salary sacrifice or not and will it accept employer contributions?”
He continues: “Whilst the LISA could be great news for young savers no longer having to choose between saving for their first home or retirement, it may not be the right option for others. Therefore, individuals will need to think about their own saving goals and what options they have to achieve them. This then creates the pressure on employers to consider how they can support employees who all want to save in different ways. We already see many companies giving employees a percentage of their salary to buy 'benefits' so could this be a method of funding the LISA in the future?
“We’ll have to wait until the specific rules are defined, but assuming it will work like current ISAs then employers may, for example, take a ‘mix and match’ approach, allowing employees to divert their employer benefits to various saving vehicles. However, if employer pension contributions are diverted to ‘extra salary’ for individuals to fund their LISA, there will be no tax and national insurance relief. At face value employees could be worse off, but may trade this in favour of flexible access with the government top-up.”
Watts-Lay concludes: “Whether employees decide the LISA is right for them or not, the need for financial education, guidance and advice has never been more apparent.”