Save, make, understand money


Increase Lifetime ISA allowance and bonus, think tank urges

Paloma Kubiak
Written By:
Paloma Kubiak

The government should double the bonus rate it is offering for the Lifetime ISA and savers should be able to deposit more each year into the scheme, a think tank recommends.

A report by The Centre for Policy Studies (CPS) said people should be able to save up to £8,000 a year into the Lifetime ISA, double the £4,000 amount proposed, in addition to a list of other options to “broaden the appeal” of the scheme.

What is the Lifetime ISA?

At the Budget 2016, the government unveiled the Lifetime ISA to help people under the age of 40 buy their first home and save for retirement at the same time.

Set to launch in April 2017, the Lifetime ISA (LISA) allows people to contribute a maximum of £4,000 each tax year and receive a 25% government bonus – so up to a maximum of £1,000.  But the money must either go towards their first home or their retirement.  Early withdrawals will carry a 5% charge.

Following the announcement, LISA was condemned by some in the pensions industry amid concerns it could undermine auto-enrolment and lead to the recently launched Help to Buy ISA being phased out. But it was also hailed as “well-suited” for the self-employed who would be given access to a pension scheme.

Increasing the LISA appeal

As part of its report, the CPS listed a range of steps to “broaden the appeal of LISA”. As well as increasing the government bonus rate and contributions cap, it proposed introducing a low-cost default fund as “most people are uncomfortable with making investment decisions”.

It also proposed extending the age range for contributions from the currently proposed 18 to birth. It also said existing but now defunct Child Trust Funds and Junior ISAs could be “assimilated” into the Lifetime ISA, to simplify the savings landscape for children

The report’s author, Michael Johnson, said: “The Lifetime ISA is an opportune vehicle with which to address looming intergenerational inequality. The bonus should be doubled to 50%, funded by terminating higher rate tax relief on pension contributions (a move which could also leave scope to reduce the deficit). In time, the £4,000 cap on contributions should be raised to perhaps £8,000. This, combined with the Treasury bonus, would provide more than adequate savings capacity for over 90% of the population.”

However, Steven Cameron, pensions director at Aegon, said that extending the scheme should be considered with “extreme caution”.

He said: “In the months before the Budget, the concept of replacing the existing system of pensions tax relief with an ISA style approach was widely debated and almost universally rejected. The so-called pension ISA would add unwelcome complexity for all existing savers, undermine auto enrolment and introduce inevitable political risk of savings being taxed again when taken. Proposals to extend the LISA to the workplace looks very much like the pension ISA, creating these same issues and need to be considered with extreme caution.”