George Osbourne has announced plans for a new Lifetime ISA as part of his Budget 2016. The purpose of it is to encourage people to save which is something many tend to struggle with, especially young people.
If you sign up for a Lifetime ISA after April 2017, the government will pay you £1 for every £4 you save. The maximum you can save is £4000 a year, meaning you could receive up to £1000 free from the government.
The ISA announcement came as a shock to many, a pleasant surprise to some, too good to be true for others. It has also received its fair share of criticism: it doesn’t address the fact that people have no spare cash to save and it is most likely to benefit the already-rich who probably don’t need the extra help. Aside from this, the reaction has been mostly positive.
The catch is that the money can only to be used for either buying a house or for a pension. It applies only to people between the ages of 18 and 40 and will last until you’re 50.
If you use it to buy a house, the money can only be used by first time home buyers. The maximum house value you can spend it on is £450,000, making London a little trickier for some. If you are already a home owner, you will have to wait until you’re 60 to be able to withdraw money for a pension instead.
Like standard ISAs you can withdraw money at any time for other purposes. However, current plans are in place to discourage people from doing this for anything other than buying a house or cashing out a pension. If you do withdraw money, you will not qualify for the government bonus and will have to pay a 5% charge. The government is considering allowing people to withdraw money for other reasons without being penalised, but nothing is certain so far.
How might it affect freelancers?
The Lifetime ISA may be useful for addressing the two main financial issues that face many self-employed people face, getting mortgages and pensions. While the ISA won’t necessarily help you get a mortgage, it may help you save enough for a decent deposit. You will be encouraged not to touch any money in the account due to the charges and the removal of the government bonus. It may help people who struggle to save in traditional accounts as well as providing a nice bonus preferable to current interest rates.
The absence of a pension plan is something that can harm freelancers in the long run. While you can always set up your own pension plan, they usually have strict rules which don’t suit people who are committed to a flexible lifestyle. If used for a pension, the ISA will make it easier to save but you can also take money out at any time for emergencies. This offers an element of flexibility to the pension plan that many freelancers will prefer.
However, you could end up paying a lot to access your own money. For this reason, it might put some people off. Losing the bonus is one thing, but having to pay to get your own money is something the government will likely have to rethink if they want people to use this new ISA.
Alternatively, if you feel that the charges and the restrictions on usage are too off-putting, you can still save in a standard ISA, tax free.
The amount you can save in a standard ISA is also increasing again, to £20,000 a year. People will be able to have a standard ISA and a separate Lifetime ISA, subject to the £20,000 a year limit. Which means if you save the full amount in the Lifetime ISA, you can only put a maximum of £16,000 in your standard ISA, which is unlikely to bother many people.
You can use ISAs for mortgages, pensions and anything else, meaning the flexibility is preferable. Choosing between the two ISAs will be down to personal circumstances. If you are unlikely to take any money out, the Lifetime ISA could be a great scheme. It’s free money after all.
What do you think of the new ISA? Will you be using it? Let us know your thoughts in the comments.