People in the UK are saving less than ever before. The latest set of figures show that the nation now has just 1.7 per cent of GDP set aside. That’s the lowest ratio since records began in 1960 and is way below the average of 8 per cent in the last 30 years. By way of comparison, the Americans save 5 per cent of their GDP and the Germans 10 per cent.
This lack of savings is a worry when it comes to our ability to withstand an economic shock but it also creates an issue when it comes to paying for everything from a house deposit to funding a safe and happy future for yourself.
That’s where the Lifetime ISA aims to make a difference. It’s a new long-term financial product launched this year by the Government and it pays to try to understand how this will work and what the proposed benefits are if you’re looking to save more.
The Lifetime ISA explained
The Lifetime ISA adds to the ranks of different Individual Savings Accounts available to savers. From simple cash ISAs to stocks and shares ISAs and Help To Buy ISAs, there are already a variety of products on the market to help to encourage tax free saving.
This is a savings account that is open to people aged 18 to 39. Savers can pay in up to £4,000 a year and will get a 25% Government bonus added to their account at the end of their first year (from 2018/19 this will be paid monthly).
People can pay until they turn 50, meaning that there’s a potential bonus of up to £32,000 up for grabs and they can either:
- Take the money when they are 60 or
- Use it when they want to buy a first home
What are the benefits of a Lifetime ISA?
Clearly the chance of getting your hands on £32,000 of ‘free money’ from the Government is a key selling point of the Lifetime ISA.
For most people, especially those not looking to buy a home in the next year, the Lifetime ISA is more generous than the Help To Buy ISA. You can put more into this account, can invest in a stocks and shares ISA, can pay for a more expensive home and get a bigger possible Government bonus.
The benefits of the bonus are not just felt by first time buyers, with people getting the chance to use this to fund a more comfortable future too.
A huge note of caution for savers
So, is it a no brainer? Well, not quite. Firstly, the Government has rather poor form in recent times when it comes to delivering on the bold promises made when launching new ISAs. Many first time buyers certainly felt let down when it emerged that they could not use the Help To Buy ISA to actually fund their deposit. In this case, there is some debate as to whether you’d be better off sticking with – and topping up – your pension instead of taking out one of these ISAs.
Not only that but this has also been met with a decidedly lukewarm response by the industry – with banks choosing not to offer this to their customers and only a small number of lenders showing an interest in the Lifetime ISA.
These doubts might well prove that investors ought to adopt a ‘wait and see’ policy. There could be sound reasons for people to take out a Lifetime ISA, but people will first want reassurance that this is going to deliver on its promises and work for their particular financial circumstances.