6th April 2017 saw the introduction of Lifetime ISAs in legislation, but three months into the new rules there remains very little choice, with the market offering one Cash ISA, two very restricted Investment ISAs and one “self-select” but directly administered ISA; the latter remains the likely best choice for those looking to invest for the longer term.
There are both differences and similarities between a Lifetime ISA and a Pension, but basic rate taxpayers may actually prefer to contribute to a Lifetime ISA.
Whilst a Lifetime ISA may not receive contributions from an employer, the effective uplift on a Lifetime ISA is equivalent to basic rate tax relief but the proceeds are tax free from age 60. This is more favourable than a pension which has the same initial uplift for a basic rate taxpayer, but only 25% is tax free with the remaining 75% being taxed as income (but from as early as 55). The situation is more complicated for higher rate taxpayers, and those who are likely to be nil rate taxpayers in retirement.
Part of the reason that the offering of Lifetime ISAs is so derisory, in my view, is that providers are nervous of Government tinkering. I also fear they see Lifetime ISAs as principally a savings vehicle for those looking to buy their first home.
The reality is that where individuals can afford to leave monies there until age 60 there are potential benefits as detailed above.
One of the more insidious features of a Lifetime ISA is that where an individual has not applied for one before their 40th birthday, they can never have a Lifetime ISA, but where someone holds a Lifetime ISA before they are 40, they can continue making contributions through until the age of 50. This could be worth at least £10,000 of additional “saver’s bonus”.
This means that individuals born in 1977 and 1978 who have not yet reached 40 may want to consider putting at least £1 into a lifetime ISA to leave the door open for the contribution between 40 and 50 sooner rather than later.