Budget 2016: The government is to introduce a new savings mechanism known as a Lifetime individual savings account (Isa).
Chancellor George Osborne announced the plans in his Budget 2016 speech today (16 March).
The Lifetime Isa is aimed at helping young people save for the long term, with a particular emphasis on saving for retirement and for first homes.
From April 2017, those under the age of 40 will be able to save up to £4,000 a year in a Lifetime Isa. The government will pay £1 for every £4 saved.
Contributions can be made with the 25% government bonus paid up to the age of 50. The government bonus will apply to savings withdrawn for retirement from the age of 60, and at any time from 12 months after opening the account for purchasing a first home.
A national limit of £450,000 will apply for property purchased using Lifetime Isa funds.
Savings can be withdrawn for other purposes at any time but the 25% bonus and any interest or growth on this must be returned to the government. These withdrawals will also be subject to a 5% charge.
Osborne said: “For those under 40, many of whom haven’t had such a good deal from the pension system, I am introducing a completely new flexible way for the next generation to save. It’s called the Lifetime ISA.
“Young people can put money in, get a government bonus, and use it either to buy their first home or save for their retirement.
“For the basic-rate taxpayer, that is the equivalent of tax-free savings into a pension, and unlike a pension you won’t pay tax when you come to take your money out in retirement.
“Unlike a pension you can access your money any time without the bonus and with a small charge.
“And we’re going to consult with the industry on whether, like the American 401K, you can return money to the account to reclaim the bonus, so it is both generous and completely flexible.”
Phil Wadsworth, chief actuary at JLT Employee Benefits, said: “Are new attractive Isas set to take over pensions?
“Getting one pound for every four is a straightforward incentive to save. Coincidentally, it is the equivalent of pension tax relief for a basic-rate tax payer. The fact that Lifetime Isas are much more flexible means younger people will likely find it more attractive than pension savings.”
Joanne Segars, chief executive at the Pensions and Lifetime Savings Association (PLSA), added: “The introduction of a Lifetime Isa is an interesting initiative to help younger people add to their pension and lifetime savings. We look forward to working with the government to help make sure that the Lifetime Isa does help younger people build up their savings.
“An important part of this will be to make sure that savers’ interests are protected by ensuring that the regulation on charges and governance of the Lifetime Isa are comparable to those for pensions, which have been reviewed to make sure they offer savers good value.”