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Government top-ups of 25% will be available on savings of up to £4,000 a year, up to the age of 50.
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The fund balance (including the Government top-up) can be withdrawn tax-free from the age of 60 or where funds are used to purchase a first home.
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Early access for other purposes will be permitted, but the bonus will be returned to the Government and a 5% charge applied.
“The Lifetime ISA looks like a foot in the door for more radical change. Once the infrastructure is in place, contribution limits and top-up values can easily be tweaked and the age limit reduced. If LISAs prove popular, this will strengthen the Chancellor’s hand.
However, if the end game is for LISA to replace pensions, there will need to be a way for them to accept employer contributions with tax siphoned off and a top-up applied.
“Where the money saved in a LISA is left there until retirement, the comparison between the 25% Government bonus and pensions tax relief depends on the tax the individual pays both in work and in retirement, and on whether the pension contribution comes from the individual or is offered by the employer as an alternative to salary.
“For a basic rate taxpayer contributing out of their own pocket, the LISA top-up will be no better or worse than pensions tax relief if they pay no tax in retirement. Where withdrawals attributable to new pension savings would be taxed at 20%, the current system is equivalent to a 6.25% top-up after the tax-free lump sum is taken into account, so the LISA’s 25% top-up is much better.
However, for a 40% taxpayer who expects to pay 20% tax in retirement, pensions tax relief is equivalent to a 41.67% top-up – that trumps the 25% on offer through a LISA. As this shows, 40% taxpayers who shift tax bands after retirement should feel most relieved that a radical overhaul of pensions tax relief has been put on hold.
“National Insurance relief on employer pension contributions, which has been reprieved in the Budget, means that an employer’s money will go significantly further if paid into an employee’s pension than if used to provide salary that is saved into a LISA after tax and NICs have been deducted. Where an employee pays basic rate tax both when working and in retirement, an employer willing to spend £1,000 can provide £850 of disposable retirement income through a pension or £747 through a LISA.
“Allowing the Government bonus to be put towards the cost of a first home may not help first-time buyers as a group. If two LISA savers bid against each other for a home, it is the seller who will benefit from their capacity to pay higher prices. Ironically, it may do more to improve the lifetime wealth of first-time buyers if they collectively locked more money away for retirement and offered less for the homes they want to buy. However, if the people you are competing against in the housing market are dipping into their retirement savings, you may feel obliged to as well.
“Undoubtedly, the inaccessibility of pension savings limits how much people are prepared to contribute, especially when retirement is a long time away. On the other hand, saving in a pension means you only have to resist temptation at the time you make the contribution, not every day.”
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