Budget 2016: Lifetime ISA revealed

16th March 2016

Our CEO Phil Smith believes the announcement of the Lifetime ISA at today’s Budget is a stroke of pragmatic genius from the Chancellor.

“The introduction of the Lifetime ISA is a stroke of pragmatic genius from the Chancellor. He is starting to tackle the incentive for long-term savings, with upfront tax efficiency, but allowing the flexibility to use the capital on the biggest single asset purchase most people ever make.

“We will see that asset increasingly forming part of their pension/decumulation in later years in any event. This will mean that SIPP providers will increasingly need to offer Lifetime ISAs as part of their strategic proposition. We intend to do so, ready for April 2017. “The next test will be whether the Government allows the use of Lifetime ISAs as the vehicle to wrap auto-enrolment savings. It would make absolute sense for them to do so, and to further encourage early-stage tax efficient savings for the young and lower paid in the market. “We think of auto-enrolment pensions as an occupational vehicle and we shouldn’t. SIPPs or Lifetime ISAs for individuals should be the ‘catcher and holder’ of assets funnelled through auto-enrolment.”

Take a look at the key changes

Today the Chancellor delivered his Budget for 2016. Below are the key points that you may wish to bear in mind when discussing with your clients the impact of the announced changes on retirement savings.

Lifetime ISA

  • From 6 April 2017 anyone under 40 will be able to open a new Lifetime ISA.
  • There will be an annual savings limit of £4,000, and for every £4 someone puts into a Lifetime ISA they will receive a £1 bonus from the Government. This mirrors the rate of tax relief available to basic rate taxpayers on pension contributions. Additional savings can be paid with the government bonus up to age 50.
  • Savings in a Lifetime ISA can be used to buy a first home (worth up to £450,000) at any point from 12 months after the account is opened, or to pay an income in retirement from age 60. Savings used in this way can be withdrawn tax-free and with the full government bonus.
  • If savings are withdrawn for any other purpose the government bonus on that element of the fund, plus any interest or growth on it, must be returned to the Government. A 5 per cent charge will also be applied. The Government will explore whether there are other lifetime events that should mean someone can withdraw money from a Lifetime ISA without incurring these penalties.
  • The Government will also be looking into whether individuals should be able to borrow against the savings in their Lifetime ISA along similar lines to those in the US can borrow against their 401k policies.
  • Individuals with a Help to Buy ISA will be able to roll those savings into their Lifetime ISA during 2017/18 and still save an additional £4,000. Help to Buy ISAS will continue to be available until November 2019, but anyone who has both a Help to Buy ISA and a Lifetime ISA will only be able to use the government bonus from one of their accounts to purchase their first home.

Other changes

  • From April 2017 the personal allowance will be increased to £11,500. You should remember that individuals earning over £100,000 can pay pension contributions to reduce their adjusted net income and thereby regain some of their allowance.
  • From April 2017, the higher rate income tax threshold will be increased to £45,000. All things being equal, this means that higher rate taxpayers will receive 40 per cent tax relief on a lower portion of their contributions.
  • Various changes have been announced to the tax treatment of benefits payable to those in serious ill health, to dependents who reach age 23 whilst receiving a dependent’s pension, and for those with pension savings up to £30,000. These amend some anomalies of the tax legislation following the pension freedoms that came into force in April 2015.
  • Changes were announced to business rates and stamp duty on commercial property. Both of these changes are positive for those who use their pension savings to invest directly in commercial property, and we will report on these in greater depth in the coming days.

The information given above is based on our understanding of the proposed changes. The information is based on current law and HM Revenue & Customs (HMRC) practice, which is subject to change.

 

Get in touch

To contact our Business Development Managers, call us directly on 0116 243 7152 or email: clientservicing@hornbuckle.co.uk 

 

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