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LISA could be a bit of a gold digger. Have a good time now, but she could leave you counting the costs in later years.
There’s a magic wand being waved around by the savings fairy right now, although you may know him as the chancellor. Actually, it’s the former chancellor, George Osborne, who, in his last Spring budget, gave the savings industry twelve months to prepare for the launch of the LISA which he hopes will help young people get on the property ladder.
Now most of us are already familiar with the Independent Savings Allowance (ISA) concept of tax-free savings up to pre-defined limits on value and time. This new variant, aimed at young property buyers, offers those aged 18-39 a 25 per cent state bonus on their savings towards the purchase of a first home or accessed after they turn 60 (which is probably also the average age of the first time home buyer these days). The bonus is worth 25% of their savings capped at savings of £4,000 per annum resulting in a £1,000 bonus in real terms – sounds great doesn’t it.
However, it may not surprise you to learn, that there’s a downside too.
There’s been criticism that the better-off will benefit most, since savers putting an annual £4,000 in their scheme seem likely to take the maximum bonus, while those struggling to raise any funds will get proportionately less. So it will benefit wealthy families, the offspring of which may just use this account as a savings account and wait until the age 60 deadline to accumulate the maximum tax free bonus from the Government over the years of £32,000 before they cash in, thank you very much.
There are also fears that younger savers will be lured away from workplace pensions, which will impact their pensions in the far future, since it will be much more expensive to make up for contributions not made in early working life. And let’s face it, basic rate taxpayers already get tax relief of 25% on their personal pension contributions and higher rate tax payers get even more – so higher rate tax payers should certainly keep this in mind when considering the LISA as an alternative savings vehicle. Plus LISA savers would lose out on the additional employer’s pension contribution if they were paying into a LISA instead of a pension – not an inconsiderable sum to lose out on.
Some providers have already said that, even when the start date is reached in April next year, they’ll not offer the LISA product. Some have said there are just too many loopholes and ambiguities that haven’t been cleared up yet.
The Treasury said that full details of the LISA would be confirmed in this autumn, but with the first snows of winter already on the ground, any enquiries are being met with a frosty response thus far. Never mind the icy conditions, the savings, investment and pensions landscape is pretty difficult terrain at the best of times. Ambiguity over a major new product makes this, clearly, not the best of times either.
The option to draw funds, tax free over the age of 60 might sound like an attractive alternative pension - but it is in fact the exact opposite as there would be no employers pension contribution accruing. That’s just one of the major nuances yet to be fully explained to potential investors.
At Springfords, we’re staying on top of the situation, but it’s more shakey than a trampoline factory. So, if you want to land on your feet, and keep a bounce in your financial affairs, may we suggest you have a word with us first. We know a thing or two about that this particular LISA, and she’s not necessarily as innocent as she looks.