Category: Pensions

Stephanie Charman takes a look at the latest developments on the government’s Lifetime ISA: A new savings account to help young people save for a house, or retirement.

How does it work?

As of April 2017, anyone between the ages of 18 and 40 will be able to open a Lifetime ISA, or “LISA”. Any savings put into the account before the account holder’s 50^th birthday will also receive an added 25% bonus. There is no maximum monthly contribution, they can save as little or as much as they like, up to £4,000 per year. The total amount someone can save each year into all ISAs will also be increased to £20,000 as of April 2017.

What can it be used for?

The savings and the bonus can be used to either pay towards a deposit for a first home worth up to £450,000, or to help fund retirement. As with the Help to Buy ISA, the accounts are limited to one per person, as opposed to one per home, which means a couple can save twice as quickly if buying together. This has made it a popular move for young couples hoping to plan for not just their first home, but their future as well.

What if they already have a Help to Buy ISA?

If they already have a Help to Buy ISA, the funds can be transferred over to the Lifetime ISA in 2017, or they can continue to save in both. But only one account will receive the bonus for a first home. So if they have both and intend to use the bonus on the Help to Buy ISA to go towards their deposit for a home, the Lifetime ISA must be used for retirement in order to receive the bonus on that account.

Can they also have a pension?

The treasury is keen to remind savers that the account is not a pension and therefore can exist and run alongside other long-term savings such as private pensions. Savers can still pay into a pension and get tax relief on their contributions.

Who will offer the Lifetime ISA?

The details surrounding who will offer the LISA is still being worked out. But as with the Help to Buy ISA, it will likely generally be offered by banks and building societies. The treasury says that the new LISA will be like other ISAs, in that the funds will contain a mixture of stocks, shares and cash. When the funds are eventually withdrawn, the returns will be free of tax.

When will they receive their LISA bonus?

If using the account for retirement, all the savings can be withdrawn tax free, including the 25% bonus, once they have reached their 60^th birthday. It is possible to withdraw the funds before this time, but the governmental bonus will be lost, including any interest or growth gained. There will also be a 5% charge added if the funds are withdrawn before their 60^th birthday.

If any or all of the savings are being used to go towards a residential property, the funds can be withdrawn at any time, as long as the account has been held for over 12 months, and will retain the full bonus. In this case, they will need to claim their bonus through their solicitor or conveyancer, which may be subject to additional fees.

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A topic that has grabbed my interest this month is the new free and impartial guidance service that the Government is setting up called Pension Wise: Your Money, Your Choice, which will help the consumer better understand how to manage their pension arrangements.

My understanding is that this set up will be similar to the Money Advice Service, where guidance is given for free but there is no advice. I have to assume that the purpose of this is to provide sufficient information on the options available to the consumer to help them make a decision that will dictate their retirement lifestyle.

My question is: will the service provide enough information for the consumer to make the right choice? Surely, without the advice to accompany the guidance there could be some unintended consequences. If we take the product of mortgages as an example, unlike pensions most people know what a mortgage is and how it works, even if they don’t have one. The process is now elongated due to the implementation of MMR with regulation of advice in place to protect the consumer and deliver the right outcome to them.

The result hopefully is that most people will end up taking advice to obtain the house they want. In my mind, guidance is all part of the advice process, explaining how it works, what is needed, and the choices along the way, taking the consumer on a journey until the process is completed.

There is a fine line between guidance and advice but the Treasury website does appear to recognise this and states: “The guidance service will complement professional regulated financial advice and other services, pointing consumers to reliable sources of further help and information as needed and helping consumers recognise the value of further specialist help and advice.”

Moving house and having a pension in retirement are two of the most significant transactions a consumer will ever make and, in my opinion, advice is absolutely key to ensuring customer’s make the right decision for them both now and in the future.