Independent think-tank ‘Bright Blue’ has published proposals to simplify the Lifetime Individual Savings Account (LISA), citing the product’s complicated nature, will the government listen?
At present you must be 18 or over but under 40 to open a LISA. You can put in up to £4,000 each year until you’re 50 in order to help you buy your first home or save for later life.
In return for your saving, the government will add a bonus to your savings, up to a maximum of £1,000 per year.
That doesn’t sound too complicated, until you try and withdraw money from your LISA – if say you want to buy your first home, are aged 60 or over and/or are terminally ill, with less than 12 months to live.
If any of these don’t apply to your circumstances then, you’ll pay a 25% charge.
The withdrawal charge aims to recover the government bonus received and apply an extra charge to the original savings. This means if you treat your LISA as a short-term savings product, you could get back less than you paid in.
Bright Blue have made the following suggestions:
Liberate the LISA of its age restrictions
Contributions should be permitted from birth rather than from age 18 but, other than a £500 starter bonus, they should not attract the 25% bonuses until 18, and no access should be permitted until 18.
A LISA could also be automatically established when a baby’s name is registered, with a provider nominated by the parents, as the personal saving equivalent of workplace auto-enrolment.
In addition, the contributions age ceiling should be removed, with the caveat that any contributions made from age 50 onwards should be locked in for at least ten years (with allied bonuses).
Introduce penalty-free access
The 25% charge imposed on pre-60 withdrawals is widely misunderstood because it is not the same as the 25% bonus initially received.
There is an implicit 6.25% ‘penalty’ which is not intuitive, it adds complexity and serves no consumer purpose. It should be eliminated, by simply reducing the withdrawal charge from 25% to 20%.
Include the LISA to bolster Auto-Enrolment (AE)
Employee contributions made under AE should be eligible for payment into a LISA, attracting the 25% bonus. This would provide improved access (to buy the first home, for example): the risk of rising AE opt-out rates should then diminish. All savings should be as personal as a bank account.
Michael Johnson, associate fellow of Bright Blue and author of the analysis, says: “If these three proposals were implemented, then there would be no need for any other ISAs. The Lifetime ISA could serve as a single savings vehicle from cradle to grave.”
“The LISA’s 25% bonus, determined using contributions made from net income, is equivalent to 20% Income Tax relief. Consequently, for basic rate taxpayers, LISA savings are effectively entirely tax-free if kept until 60. Remarkably few people appreciate this fundamental LISA attribute. Conversely, the effective tax rate of pension pot assets is 15% for basic rate taxpayers.
“In addition, the LISA contains a valuable free option; ready access when buying the first home, with accumulated bonuses then retained. Generation Y is slowly discovering that pension pots cannot compete with this.”
Commenting Ryan Shorthouse, director of Bright Blue, says: “The Conservative government needs to do more to support younger people, for both political and moral reasons. Simplifying and enhancing the Lifetime ISA would offer those in their twenties and thirties significantly greater financial support and flexibility with their savings.
“It would be a clear and considerable policy that would show the Conservative Government is serious about supporting younger generations who want, but struggle more, to climb the ladder of life.”
National IFA, LEBC Group, has welcomed proposals published by independent think tank. The proposals, which would render the Junior ISA effectively redundant, would give every child an opportunity to accumulate savings from birth and a simple means of building a lump sum to be used as a deposit on a first home – with the added benefit of a government bonus to boot.
Sabuhi Gard is an investment writer for Incisive Works
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