The mission statement for the 2016 budget delivered by George Osborne is to “put the next generation first” – a group he referenced 18 times in his speech.
The new lifetime ISA is fundamental to achieving this. Osborne touted it as “a completely new flexible way for the next generation to save”. But a closer look at the terms and conditions of the new ISA shows there are many it will not benefit.
So, what is it?
Starting in April 2017, savers aged between 18 and 40 who open the new lifetime ISA and put in up to £4,000 a year will get a 25% top-up from the government until they reach 50. That means a maximum of £128,000 in personal savings that will be topped up to £160,000 if you start at 18 and continue for the 32 years the ISA is available.
After the first 12 months of saving, investors can use the lifetime ISA balance to buy a house, provided it is a first-time purchase that costs no more than £450,000. And balances from the current Help-to-Buy ISA can be transferred across. After the age of 60, savers can withdraw funds “for retirement” free of tax. It is not clear whether that means the saver has to actually retire or just needs to be over 60.
Any withdrawals by savers under 60 who aren’t buying a house (unless they are terminally ill) will have the government top-up (plus any interest on it) deducted, and also suffer a 5% tax charge.
It is questionable how useful this new lifetime ISA is for the next generation. First off, it is not very flexible. Savers needing to draw money out before they reach 60 will be penalised if it is not being withdrawn for a first-time house purchase (or terminal illness). There is a dearth of opportunities for short or medium-term saving, and the budget offers no solution.
The Treasury’s own Policy Costings are also vague about what it will cost. The Treasury admits that:
The main source of uncertainty is the behavioural impact, because the cost of the top-up is extremely sensitive to it. In particular, assumptions are made about: the number of people choosing to use the lifetime ISA; how much they choose to save; and when they choose to withdraw.
There is little information that can be used to inform these assumptions and the behaviour is dependent on a variety of other factors, which amplifies the uncertainty.
Based on these uncertainties, the Treasury says it could cost £850m to service these ISA savings by 2021 – but this might be less or it might be more.
It all depends on the number of next generation members who can afford to use it. The £4,000-a-year maximum would be challenging for people on the median household disposable income, which for 2014-15 was £25,600 according to the Office for National Statistics.
On the other hand, as the Office for Budget Responsibility (OBR), the UK’s fiscal watchdog, points out, wealthy parents could give their over-18 offspring an annual £4,000 for the ISA, attracting the £1,000 a year top-up.
The lifetime ISA joins up with the Help-to-Buy Scheme, currently viewed as having boosted UK property prices – by an average of £8,250 according to a 2015 Shelter study. The OBR warns that the new ISA will only increase demand for the relatively fixed supply of UK housing. It estimates that this could lead to an additional 0.3% increase in house prices.
The ISA has another possible function, as a first step in a move towards an ISA-based regime for pensions. Instead of getting tax relief on pension contributions (as you do now), people using a pensions ISA would contribute from income after tax, but get their retirement income from it tax free.
Critics claim that this change may deter savers, as well as creating confusion while the new auto-enrolment scheme is still bedding down. The Association of British Insurers has been very cautious in welcoming the new ISA, commenting that it “must not be a back door to a pensions ISA”. But there is agreement in the industry that the new ISA is a likely step in that direction.
The new lifetime ISA also looks like a move toward asset-based welfare. This is where welfare policies are made not simply because they are helpful for as many people as possible – like social housing or nationalised health services. The lifetime ISA is aimed at a particular set of relatively affluent individuals who can afford to save for the long term.
Many of the next generation will never be able to save; some won’t be able to start at 18 (and maybe not even at 40) and some won’t be able to leave a lot of money in an ISA for the long term. George Osborne’s new lifetime ISA has little to offer those members of the next generation.