Osborne said people under 40 will be able to save up to £4000 every year through the new ISA from April 2017. The government will add £1 to every £4 saved annually by the account holder until they turn 50.
Osborne said he hopes the new ISA will encourage the next generation to save and prevent them from having to choose between saving for a house or contributing to a pension scheme for their retirement.
“With the new Lifetime ISA, the government is giving you money to do both,” he declared, pointing out that for the basic rate taxpayer, the scheme is the equivalent of putting tax-free savings into a pension.
Unlike a pension however, savers will be able to withdraw the money free of tax when they turn 60. Savers may also use the pot, including the bonus, to buy a first home worth up to £450,000.
Whether saving for a pension or buying a first home, the saver benefits fully from the scheme. However there are catches for those who want to use the money for other purposes.
Savers are able to make withdrawals at any time for other purposes. However, they must pay a charge of 5% and surrender the government bonus on any cash withdrawn.
Osborne said he plans to consult with the pensions industry on whether account holders should be able to subsequently return withdrawn funds to their account and reclaim their bonus. This would make the scheme “both generous and completely flexible”, he added.
The chancellor added that he hoped the Lifetime ISA would also support the self-employed who, like the younger generation, tend to ignore the need to save for their retirement. Even as self-employment has been rising over the past decade, the number of self-employed people paying into a personal pension has fallen from over a third in 2001 to just one in 11 today, according to recent figures published by financial firm Prudential.
Osborne also announced that he will increase the ISA limit from just over £15,000 to £20,000 per year for everyone, and raised the tax-free personal allowance to £11,500 – a tax cut for 31 million people.
The Office for Budget Responsibility forecast that the additional capital provided by Lifetime ISAs would likely contribute 0.3% to house price inflation between now and 2020/21, and will also worsen average household debt-to-income ratios. The level of uptake is highly uncertain at present, but the OBR forecasts the Lifetime ISA together with higher cash ISA limits will cost the government £170m in 2016/17, rising to £850m in 2020/21.
